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Illumina Puts Affy in Crosshairs As Q2 Revenue Surges Amid Strengthening Genotyping Market


Rapidly growing adoption of pharmacogenomic technologies, especially whole-genome genotyping instruments and services, helped drive Illumina's second-quarter revenue 163 percent year over year and turn a loss into a profit, the company said this week.

Illumina said it predicts the high-throughput genotyping sector to continue expanding as more academic researchers perform large-scale disease-association studies and pharmas become more comfortable using the technology in clinical development, as well as early research.

This view is in stark contrast to the opinion of Illumina's biggest rival, Affymetrix, which in February said "the market for whole-genome mapping products has temporarily slowed." [see Pharmacogenomic Reporter sister publication BioArray News]

Illumina also said it will begin selling regulatory-approved versions of its BeadExpress system to CLIA labs next year and file its own assays for molecular diagnostic applications in 2008.

Illumina's strong quarter caused investors to drive its stock up 27.5 percent, or $7.99, to $36.82 in mid-afternoon trading Wednesday. The shareholders' response contributed to the more than 95 percent Illumina's stock has grown since the beginning of the year. By comparison, shares in Affy slid more than 51 percent in that timeframe [see chart].

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Separately on Wednesday, UBS reduced its stock target for Affy after the array company said on Tuesday it would cut the price of its two-chip 500K array to $250, "effective immediately." In a statement released 29 minutes after Illumina unveiled its second-quarter earnings, Affy also said that its 1 million-SNP product, which is scheduled to be released to a limited number of customers in the first quarter of 2007, is expected to sell for around $500.

Strong Quarter Brightens '06 Outlook

According to Illumina, total receipts for the three months ended July 2 jumped to $41.6 million from $15.8 million in the year-ago period. Product revenue in the quarter grew 188 percent to $36.4 million year over year, driven by more than 200-percent growth in consumables and instrumentation sales, according to chief financial officer Christian Henry.

He said consumables represented nearly half of Illumina's total receipts in the quarter.

Service and other revenue grew 72 percent to $4.8 million. This includes receipts from Illumina's genotyping services business and revenue from instrument maintenance contracts.

Research revenue declined to $379,000 from $405,000 year over year.

Illumina posted a profit of $6.8 million for the quarter, compared to a net loss of $15.8 million in the year-ago period. The company noted that its Q2 2005 results included a $15.8 million R&D expense related to its acquisition of CyVera in April 2005.

R&D spending excluding non-cash stock compensation expense inched up to $7.7 million from $7.3 million year over year.

SG&A, meantime, increased to $12.9 million from $6.5 million year over year. Around $2.1 million of this increase was due to stock options while the remainder was related to expansion of commercial activities and "increased spending" on litigation, including its suit with Affymetrix.

Citing "particularly robust growth" in the whole-genome genotyping market, Illumina has upgraded its full-year revenue projections to between $160 million and $170 million, which is $30 million more than the firm's original forecast, released at the end of the first quarter. This represents year-over-year growth of between 118 percent and 131 percent.

Third-quarter revenue is expected to increase to between $44 million and $48 million, or between 126 percent and 146 percent.

R&D is expected to range between $30 million and $35 million for the year, Illumina said.

The company had around $152 million in cash and equivalents and $4.5 million in short-term investments as of July 2.

'Robust' Market Fattens Capacity

In a conference call with investors this week, CFO Henry said Illumina sees "particularly robust growth" in the whole-genome genotyping market. CEO Jay Flatley explained that driving this growth is an "enormous desire in the academic research groups to do large-scale disease-association studies."

He said the market for custom genotyping and whole-genome genotyping is "probably growing in excess of 50 percent a year."

Flatley also said that this market is in "early innings" and that it will "continue to grow as pharma and biotech companies adopt whole-genome genotyping in all aspects of their research and clinical development programs."

"Previously big pharma largely outsourced genotyping because … it was not clear which SNPs to use. I think with the advent of whole-genome technologies [and] the ability to put a high percentage of SNPs that offer great genomic coverage on a chip … many more companies are looking at bringing the technology in house."

"That market alone could ultimately be a $500 million market," Flatley said.

Flatley also said that although Illumina "continues to see very robust growth" in its services business, it also sees a trend among pharmaceutical companies buying instruments and running their own assays rather than outsourcing the research.

"Previously big pharma largely outsourced genotyping because … it was not clear which SNPs to use," said Flatley. "I think with the advent of whole-genome technologies [and] the ability to put a high percentage of SNPs that offer great genomic coverage on a chip that that technology question is being resolved, and many more companies are looking at bringing the technology in house."

His comments reflect recently disclosed plans by Merck to begin developing an in-house genotyping program. According to Pharmacogenomics Reporter sister publication BioArray News, Merck hasn't disclosed what genotyping company will provide it with equipment, though a Merck official mentioned Affymetrix and Illumina as possible vendors. He also said Merck will continue to outsource some of its genotyping needs.

Merck and Affy subsidiary Perlegen have had at least one R&D alliance in the past, while Illumina has not disclosed whether it has ever partnered with the drug maker (see BAN 10/5/2005).

Flatley said Illumina left the second quarter with a backlog that was more than 85 percent larger than the next-biggest quarter. He said this dynamic "reinforced" the company's view that the whole-genome genotyping market is growing significantly.

Flatley said the company has fulfilled ahead of schedule its goal of doubling capacity from April levels by the end of the third quarter. He said Illumina will continue to expand its BeadChip manufacturing in San Diego and confirmed that the company has the infrastructure in place to accommodate additional expansion.

Illumina's ongoing plan to boost capacity is in response to growing demand, and one way to grow demand is to cut price. Shortly after Illumina released its second-quarter earnings report Tuesday evening, Affymetrix announced that it would cut the price of its two-chip 500K array to $250 "immediately." Though investors read this as a sign of weakness — shares in Affy were down 5.5 percent, or $1.25, at $22.10 in mid-afternoon trading Wednesday — it remains unclear how the consumer market will react.

What is clear, however, is Illumina's take on the price cut. Asked whether Affy's move will impact Illumina's guidance for the second half of the year, Flatley said no, and added that his company's premium pricing — Illumina's chips range in price from $800 to over $1,500 — reflects the quality of the content.

Affymetrix also said it plans to release its 1 million-SNP product to a limited number of customers in the first quarter of 2007. The chip is expected to sell for around $500, Affy said. Illumina, meantime, has said it won't develop a million-SNP chip because it doesn't see a market for one. Illumina said there are other ways to perform whole-genome studies on so many SNPs, one of which is to employ two of its 650K arrays.

In the conference call, Flatley stressed that Illumina's "longer-term models" continue to show that prices for whole-genome chips will fall in coming years and the company has been "instrumental" in lowering its prices over the past five years by a factor of a thousand.

Diagnostics and Regulatory Outlook

Providing an update for the company's BeadExpress system — which will play a key role in the company's diagnostic alliances in general and with Decode Genetics in particular — Flatley said Illumina has manufactured the beta system and that it will shortly be delivered to the company's headquarters.

He said Illumina will complete the beta testing and finish assay integration and manufacturing programs in the second half of the year, and reiterated that the company plans to launch the product before the end of 2006.

Flatley said the goal is to get the system cleared by the US Food and Drug Administration roughly by the end of 2006. This will enable Illumina to begin selling the instrument to CLIA labs, which will develop their own tests on it. Next year Illumina plans to perform "all of the analytical and diagnostic validation steps of the marker sets," enabling it to file its content with the FDA and begin deploying them in 2008.

Shedding light on Illumina's plans to grow in the diagnostic market, Flatley said the company may build and combine its own sales staff to sell diagnostic products while partnering with others. "It's likely to be a hybrid model," he said. "We're in the process of making some final evaluations."

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