Uncertainty surrounding research funding in the US and Europe combined with lower-than-expected sales of its next-generation sequencing instruments caused Illumina to warn last week that its revenues for the third quarter would be lower than originally forecast.
It is unclear what role array demand played in the company's Q3 performance. According to Illumina's preliminary results, total sales slipped 1 percent to $235 million from $237 million year over year. Projected revenues also fell below the Wall Street consensus estimate of $277.7 million.
The results, fueled by what CEO Jay Flatley called "an unprecedented slowdown in purchasing," also caused the company to suspend future forecasts indefinitely.
Flatley declined to provide additional details about the mix of the firm's revenue ahead of the company's earnings release, scheduled for Oct. 25.
In a statement, Illumina blamed its Q3 performance on "purchasing delays for both instruments and consumables, particularly among large-volume centers," due to questions about future funding for genomics research.
Other factors contributing to the shortfall included the launch of the firm's V3 sequencing kits, which "created excess capacity that customers were unable to fully utilize," leading to a "decrease in the consumable revenue-per-instrument due to fewer runs."
The company also cited a "significant drop in reagent usage by our remaining Genome Analyzer installed base" and "lower-than-expected upgrades of Genome Analyzers to HiSeq 2000 systems."
Flatley said that the company is "highly disappointed" with its Q3 revenues. "In the quarter, we saw what we believe to be an unprecedented slowdown in purchasing due to uncertainties in research funding and overall economic conditions, as well as a temporary excess of sequencing capacity in the market," he said.
"We expect these conditions to continue through at least the fourth quarter, while the 2012 [and] 2013 US budgets for NIH and other related agencies are determined," Flatley added.
Flatley has tried to assure investors that the firm will remain secure despite potential cutbacks in future National Institutes of Health budgets. During a series of investor conferences last month, he said that increased demand for next-gen sequencing tools and Illumina's expansion into applied markets like agricultural biotechnology research and forensics could offset any loss of sales due to a constrained NIH budget (BAN 9/20/2011).
"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 month at the Rodman and Renshaw Global Investor Conference in New York.
At the same time, he acknowledged that the company is exposed to changes in NIH funding, with roughly one-third of its business coming directly from NIH-funded customers.
During the same conference, Flatley predicted that the firm's 2012 revenues in Europe should remain stable, stating that budget cuts slated for some EU nations would most likely occur in countries that "do not participate significantly" in life sciences research. "The situations in Greece, Ireland, and Portugal don't really impact us," he said.
Illumina is not the only vendor to suffer from the weak funding environment. Affymetrix, its main array rival, has struggled with lackluster European sales for several quarters. During its first-quarter earnings call, former Affy CEO Kevin King said that Europe is the "most challenging" region for the company at the moment for a "variety of funding and economic reasons" (BAN 5/3/2011).
In the same call, King said that the academic funding environment in the US is "challenging" and "competitive," a situation that has left the company "vying for dollars" against other firms, like Illumina.
Then in July, Affy cited weak sales to academics, particularly in North America, as one of the reasons its Q2 revenues fell more than 9 percent year over year (BAN 7/12/2011).
Though Illumina's Flatley declined to shed additional light on the firm's Q3 sales ahead of their formal release later this month, Illumina in general has seen array sales improve in recent quarters.
During the company's Q2 call in July, for instance, Flatley said that the firm's microarray revenues grew more than 10 percent year over year, which he attributed to growth across its array products, particularly whole-genome genotyping arrays for genome-wide association studies (BAN 8/2/2011).
Illumina's Q2 sales were up 36 percent on sequencing and array revenues, with total sales for the three months ended July 3 rising to $287.5 million from $212 million for Q2 2010.
"We shipped more samples of GWAS arrays than in any other quarter in our history," Flatley said during the call, adding that demand also rose for its custom-content and focused-content arrays. Array instrumentation sales were also up in Q2 due to an increase in shipments of Illumina's HiScan and HiScanSQ systems,
Illumina's latest whole-genome genotyping array is its 5-million-marker HumanOmni5-Quad DNA Analysis BeadChip. The firm launched the chip earlier this year and the company has in the past linked broad adoption of the new chips to successful studies by initial adopters.
At the Morgan Stanley Healthcare Conference last month, Flatley said that there are "four or five of these proof-of-principle studies underway" based on the firm's Omni2.5 BeadChip, which it launched last year. He said that the first results of the studies may be discussed at the American Society of Human Genetics annual meeting, held in Montreal this week.
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