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Despite Aggressive Pricing, Illumina Expects Outsourced Sequencing to Remain Small Part of Business

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By Monica Heger

Although Illumina recently
lowered the price of its whole-genome sequencing services to be more in line with prices offered by competitor Complete Genomics, an Illumina official told In Sequence this week that services will remain a small part of its overall business.

Illumina last month lowered the price for whole-genome sequencing services for research applications to $5,000 per genome for 10 samples or more and $4,000 per genome for 50 samples or more. The move placed it in a similar price range as Complete Genomics, which currently offers whole-genome sequencing for between $5,500 and $9,500 per genome, depending on the order size, and aims to cut its price to below $5,000 per genome by the end of the year.

Complete Genomics' entire business model is based on services, while Illumina has traditionally focused on instrumentation and reagent sales. While Illumina's decision to price its whole-genome service more aggressively raised some questions about its future strategy in the sequencing market, the company believes that services will comprise a relatively minor portion of total revenues for the foreseeable future.

Christian Henry, Illumina's chief financial officer and senior vice president and general manager of life sciences, told In Sequence that the company believes its services business will continue to grow, but will remain a minor part of its total business. Furthermore, he does not foresee a transition from the instrument and consumables business to the sequencing services business "in any reasonable horizon you could think of."

"We're happy and excited about the services part of the market, but it's still a very small part of our entire business," he added. "Our customers are asking for these services," but the majority of the market is in "applications outside of whole-genome sequencing."

Henry estimated that the whole-genome sequencing services market is around 10 percent of the entire sequencing market, a number that would likely grow, but not displace the market for instruments and consumables.

Henry did not disclose what Illumina's internal sequencing costs were, but said that even with the recent reduction in its sequencing services price, it is "generating reasonable gross margins."

A recent report by Macquarie Equities Research on the sequencing market estimated that Illumina's internal cost for whole-genome sequencing, not including labor and overhead costs, is $1,777. Henry would not confirm nor deny this estimate.

In the report, Macquarie analyst Jon Groberg concluded that the whole-genome sequencing service market is a "disruptive force" that could ultimately weaken demand for high-end sequencing hardware and consumables once prices fall to the point where the "economics for doing large-scale whole-genome sequencing in-house do not make sense."

Henry agreed that for some customers, outsourcing whole-genome sequencing is a better option, particularly for research consortia where there is not an obvious physical location to run a sequencing instrument.

However, a significant number of customers are using instruments for specialized applications, and "as the cost of running the systems continues to go down, as systems get easier to use, the workflows continue to simplify, the informatics get more powerful, there's a fundamental significant set of customers that want to use these sequencers in their labs so they have control over them," he said.

Additionally, because a system like the HiSeq offers such a diversity of applications, not just whole-genome sequencing, customers want to own and operate their own systems, he said.

Illumina believes that the market for whole-genome sequencing services "will continue to grow consistent with the rest of the sequencing market," Henry said.

A Price War?

The Macquarie report also predicted that Illumina's aggressive pricing strategy could put pressure on Complete Genomics. The firm estimated that Complete's internal costs for whole-genome sequencing are higher than Illumina's — at around $3,000 per genome — which would therefore lead to much lower margins.

Complete Genomics firmly denied this cost estimate, however.

While the company does not disclose its internal costs due to competitive reasons, CEO Cliff Reid told In Sequence that its costs are under $1,000 for each of the three main categories that comprise its service: instrumentation, consumables, and computing costs. "Some are a little under $1,000, some are a lot under $1,000," he said.

Reid added that he thinks the outsourced sequencing market will continue to grow rapidly. "We're seeing a big shift to the outsourced model and I think we'll see that shift continue for years," he said.

He said he sees the sequencing world breaking into two parts: diverse, non-standardized projects, like plant, animal, bacteria, and viral sequencing, which he said will remain predominantly an instrument business; and human genome sequencing projects, which are becoming standardized and are moving toward an outsourced sequencing model.

"When you move from a world of diversity to a world of standardization, you move from a world of distributed instruments to a world of centralized factories," Reid said.

For example, in disease studies where hundreds or thousands of human genomes will be sequenced, "you don't want 1,000 different people doing the sequencing," he said.

Reid agreed with Illumina's Henry that outsourced sequencing will not completely take over the instrument business. Some projects will continue to be done within academic institutions on their own sequencers, he said, and genome centers like the Broad Institute, which designs different applications and protocols for sequencing instruments, will continue to play a large role in the market.

However, he noted, projects where large numbers of genomes need to be sequenced in exactly the same way will continue to move to the outsourced model.

"It's a permanent shift," he said.


Have topics you'd like to see covered by In Sequence? Contact the editor at mheger [at] genomeweb [.] com.

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