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Goldman Sachs Lowers Estimates on Illumina, But Favors MiSeq Growth Over PGM

By a GenomeWeb staff reporter

NEW YORK (GenomeWeb News) – Citing a market shift toward the MiSeq desktop sequencer, Goldman Sachs today revised its earnings per share estimates for Illumina.

For 2011, the investment bank maintained EPS estimates at $1.55, but lowered its forecast for 2012 to $2.04 from $2.08, and its estimate for 2013 to $2.64 from $2.70. It also cut its 12-month share price target to $83 from $84.

In a research note, Isaac Ro attributed the changes to growing interest in Illumina's MiSeq desktop sequencing platform, which could cannibalize sales of the company's larger and more expensive HiSeq system.

"Despite our cautious view on NIH funding, we continue to believe that sequencing is gaining a larger share of the overall funding pool and at the low entry cost ($70,000 to $125,000), microbiology labs will adopt desktop sequencing technology," Ro said. "With high-end sequencers priced at roughly $700,000, we see these price points as transformative for a wide range of research labs and accessible to many clinical labs."

In the case of the MiSeq system, he forecast 250 placements in 2011, up from a previous forecast of 120. In 2012, he estimated 800 system placements, compared to an earlier estimate of 700. Revenues for MiSeq and associated consumables are anticipated to increase by $36 million for 2012, as a result.

That, however, would still fall short of an anticipated decline in HiSeq revenues. For 2012, Ro forecast a 19 percent decline in placements of HiSeqs, resulting in a net revenue reduction of $78 million. That includes a loss of revenue from HiSeq-associated consumables.

Despite the lowered estimates, Ro maintained a "Buy" rating on Illumina, and said that in a short amount of time it would overtake Life Technologies as the leader in the desktop sequencing space. For 2011, he said that the Personal Genome Machine from Life Tech's Ion Torrent business has a 69 percent share of the market in terms of placement and a 65 percent market share by revenue.

MiSeq has a 31 percent share of the market by placements and a 35 percent share by revenue.

By next year, though, MiSeq will begin exerting its dominance, according to Ro. By placements, MiSeq will have an estimated 57 percent market share, compared to 43 percent for PGM, and by revenue Illumina's platform will generate three times as much as Ion Torrent's.

By 2014, MiSeq's capture of the market will grow to 73 percent by placement, while PGM's will shrink to 27 percent. On a revenue basis MiSeq will have 89 percent of the market, and PGM will have an 11 percent market share, Ro estimates.

"Despite Life's first mover advantage in the desktop sequencer market, we believe that Illumina will quickly outpace Life to be the market leader, given a superior customer experience (sample prep, automation, informatics), proven technology (same chemistry as HiSeq), and roughly equivalent pricing," Ro said.

In a separate research note, he noted that Ion Torrent's PGM system is suffering from unattainable expectations. The platform is making "good progress" with sophisticated genome centers, but most high-end labs he has spoken with have not been able to achieve strong performance data.

"We also believe the vast majority of likely customers will be far less sophisticated and therefore more sensitive to the overall user experience," Ro said.

The core desktop sequencing system user will not be as sensitive to high-end performance metrics, he added. "As a result, we see a significant opportunity for Illumina to take the majority share of the desktop sequencing market over the next few years as Ion Torrent plays catch-up on multiple levels.

"While we do believe Ion Torrent technology is differentiated and has potential, we do not see material upside to our long-term market share assumptions as this time," he said.

Lastly, he noted the recent departures of Kip Miller, the president of Genetic Systems at Life Tech, and Kevin McKernan, vice president of advance R&D at the company, as disruptive, saying they were key liaisons between Life Tech and its top customers.

"Looking back on past product development cycles in this market, we view these customer relationships as being important to the success of a new technology as major performance improvements, design changes, and ultimate endorsement depend on a healthy relationship with top early access users," Ro said.

Ro also lowered EPS estimates for Life Tech. In 2011, he forecast EPS at $3.86, down from an earlier estimate of $3.87. He also lowered his estimate for 2012 to $4.27 from $4.29, and for 2013 to $4.67 from $4.73.

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