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At Investor Confab, Illumina CFO Discusses Sequestration, Japanese Market, BlueGnome

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This story was originally posted on March 7

Illumina believes organic growth within its sequencing business, as well as contributions from recent acquisitions BlueGnome and Verinata Health, will offset potential declines in revenue related to cuts in US government funding for scientific research, according to the firm's chief financial officer.

Marc Stapley was asked last week about the across-the-board reductions in the US federal budget that took effect at the beginning of this month, known as sequestration, and how it could impact Illumina's business, at Cowen & Company's Annual Healthcare Conference in Boston. During his talk, which was webcast, Stapley also discussed the economic situation in Japan, and provided an update on BlueGnome's integration.

According to Stapley, in its 2013 guidance of 15 percent revenue growth Illumina included an assumption that sequestration could diminish 2013 National Institutes of Health funding by between 2 percent and 4 percent relative to last year's budget. However, as of March 1, he said it appeared it would decline about 5 percent.

Stapley said that the company has been seeking to diversify its revenue base, "on a product, geography, and sources-of-funding basis," to make it less reliant on NIH funding, and that currently about a third of Illumina's revenues are now tied to US government funding.

"If you do the math on 5 percent of 30 percent of our business, we think that [losses attributable to sequestration] are within that zone of manageability," Stapley said.

Illumina last month posted revenues of $1.15 billion for the year 2012, an 8 percent increase over its 2011 performance (BAN 1/29/2013). Based on the numbers Stapley provided, Illumina could stand to lose about $18 million in NIH-derived revenues in 2013 because of the cuts.

At the same time, Stapley noted that Illumina exited 2012 "feeling pretty good about the momentum" it had at year end. The firm saw overall revenues climb 24 percent to $309 million in the fourth quarter, compared to $250 million in Q4 2011. While demand for the company's sequencing products and services drove that growth, its array business also increased a more modest 4 percent, driven by demand for its HumanCore arrays and the addition of BlueGnome, which it acquired in September 2012.

According to Stapley, Illumina believes those same factors will offset any declines in revenue caused by the sequester.

"When we talk about 15 percent growth, that would include a full year of BlueGnome, versus four months in 2012; and 10 months of Verinata," he said. In late February Illumina completed its $450 million acquisition of Verinata Health, a San Diego-based provider of a non-invasive, sequencing-based prenatal test called Verifi.

In addition, Stapley noted that the "sequencing portion" of the NIH budget tends to grow, as the technology is seen as "innovative," and grants that rely on it are more likely to be awarded.

Because of these trends, Illumina thinks it will have "enough degrees of freedom" to overcome any sequester-related losses, and that's why it set its guidance of 15 percent growth year over year, Stapley said.

Japanese Impact

At the conference, Stapley was also asked about the potential impact of new Japanese policies on the firm's revenue in the country.

Stapley described a ¥10.3 trillion ($117 billion) economic stimulus package with ¥721 billion earmarked for scientific research, including ¥21.4 billion devoted to stem cell research alone as a "net positive" for Illumina.

"Japan is an interesting market for us on all fronts — HiSeq, MiSeq, the array business," said Stapley. While revenues generated in Japan currently account for about 6 percent of the firm's revenues, Illumina envisions Japan's contribution to its business growing to about 10 percent over time. "We do think that stimulus will be net positive for us, especially because stem cell research is an area of focus," he said.

At the same time, the Bank of Japan is expected to continue to ease its monetary policy. In January, it doubled its inflation target to 2 percent, a move that is expected to devalue the yen, resulting in an anticipated boost in exports.

While the Japanese hope the measures will stimulate its economy, a devaluation in the national currency could reduce the value of Illumina's currency held in country. Because of this dynamic, Stapley predicted that the foreign exchange rate between the yen and the dollar will "be a negative," for the firm in 2013, "because we hold most of our Japanese business in yen, and obviously that flows to the bottomline."

He added that he expects the benefit from the stimulus and the negative impact of the devaluation of the yen could "offset" each other this year, "but not fully."

BlueGnome Update

Stapley said that Illumina expects Cambridge, UK-based subsidiary BlueGnome to "continue to deliver," after it posted Q4 revenues of $7 million, beating an earlier Illumina estimate of $4 million for the quarter. He explained that he anticipated a "temporary slowdown" in BlueGnome's business related to the acquisition, but that the firm met an internal projection for the quarter.

According to Stapley, BlueGnome's performance was "largely attributable to the integration going so well" and because the company "didn't take their foot off the pedal and didn't slow down."

Illumina paid $88 million in September to acquire BlueGnome as part of an effort to strengthen its play in the reproductive health market (BAN 9/25/2012). In addition to its menu of CytoChips for both constitutional and cancer cytogenetic research, the firm sells internally produced 24sure bacterial artificial chromosome arrays used in preimplantation genetic diagnostics, or PGD.

Stapley said that PGD is a "significant opportunity" for Illumina, and that it is the "largest part" of BlueGnome's business. He said that there are about 1.5 million in vitro fertilization cycles performed every year globally, but that tests like 24sure have barely penetrated the market.

"Think about if you could get to 10 or 20 percent or even 50 percent of that market, and you can see how significant that would be," Stapley said of BlueGnome's opportunity. "Obviously that would take time," he added, "but our goal is to accelerate that as fast as we can."

Stapley also answered an analyst's question about a potential combination of BlueGnome and Verinata's activities. He said that Verinata has discussed "subchromosomal opportunities" in the past and that would tie more closely with what BlueGnome is doing." He did not elaborate on those opportunities, but said that it is "clear" to management that BlueGnome and Verinata "should get in a room together and talk about where synergies might be."

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