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Illumina s Genotyping Tools Biz Strong in Q2; Company Makes First Dx Deal

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For the past year or so, industry insiders have warned that there is little future in the genotyping tool shop business model.

But Illumina appears to be proving them wrong.

Last week, the San Diego-based company reported that its revenues for the second quarter had more than doubled year-over-year to $11.5 million, in a twelfth straight quarter of revenue growth. The company is also beating its 2004 forecast for sales and service agreements, and is on track to meet or beat its projected burn rate of $15 million for the year. Executives said they expect Illumina to reach profitability in early 2005.

The main driver for revenue growth is sales of new products. While revenues for the company’s genotyping services, the HapMap project, and other services have remained nearly flat over the past eight quarters, varying between $1.1 and $2.1 million per quarter, product revenues have shot up, from $1.3 million in the third quarter of 2002 to $9.0 million in the second quarter of 2003 (see graph, p. 6).

During the last year, the company has rolled out two new product lines, the Sentrix BeadChip and the BeadStation 500G. The BeadChip, introduced at the end of Q2 2003, is a chip-based array of microfabricated wells containing beads with attached oligonucleotides to interrogate various sequences for SNP genotyping and RNA profiling. The BeadStation 500G is a benchtop SNP genotyping system that can do 6,000 to 300,000 genotypes per day, using Illumina’s bead-based genotyping technology.

The company began shipping the BeadStation system, which sells for about $250,000, April 15, and said in its quarterly filing that it has sold 14 of these stations this year, along with three of its larger production-scale BeadLabs. Jay Flatley, the company’s CEO, told Pharmacogenomics Reporter that 12 of these BeadStation sales came in the second quarter.

“The key point in the quarter was the real strength of the BeadStation,” said Flatley. “We shipped a couple at the end of Q1 right as they became available, but then we were really able to make great penetration in a short amount of time.” The company’s long-term growth, he added, will be fueled by “the extent of the installed base” of BeadStation systems, “and the integrated reagents that flow onto them.” Revenue from the company’s larger BeadLabs will be fairly flat, as “there’s probably 20 sites worldwide that can use those very large systems.”

In the service area, he added, revenues fluctuate. The International HapMap project, for which Illumina has a $9 million service contract, will wrap up in early 2005, Flatley said. But he added that the company is optimistic about increasing other service revenues. “We are seeing a trend toward some very large projects being undertaken —several that are in the several hundred thousand dollar to over a million dollar range, and we think that’s very encouraging as to where the market is going.”

SG Cowen Securities analyst Eric Schmidt, who covers Illumina as well as competitors Sequenom and Applied Biosystems, also attributed the company’s strong growth to the success of benchtop systems and other new products. “They are rapidly ramping up sales on the new instrument,” he noted. “Clearly, the genotyping and SNP market has driven this growth.”

Nevertheless, Schmidt, who has in the past been among those to warn that a pure-play genotyping business model remains unproven, said the company does not have the market sewn up. (See PGx Reporter -2-21-03). “The long-term outlook here still has its questions for Illumina, [which] may pertain to how much growth they can derive in this genotyping market and how rapidly they can penetrate the expression market,” Schmidt said.

Illumina, for its part, seems to be planning for a long-term future beyond genotyping tools. This week, the company entered into a collaboration with Genomas, a startup led by Genaissance Pharmaceuticals founder Gualberto Ruano, to co-develop SNP- and haplotype-based gene marker panels related to metabolic syndrome — a group of conditions related to cardiovascular disease. (See story p. 3.) This collaboration provides the company entry into the diagnostics space, and according to Flatley, is the first move in a new direction for the company. “It is an extension of our [business] model and it’s probably something that you’ll see more of in the future,” he said.

Illumina is meanwhile shoring up its financial defenses for any bumps ahead. In May the company raised $30.7 million in a stock offering, netting $28.8 million after expenses, acccording to Illumina CFO Timothy Kish. The company also entered into an agreement June 18 to sell its San Diego buildings and the land surrounding them, then lease back the property. The deal should net the company an additional $16 million, according to filings with the US Securities and Exchange Commission.

One large bump for Illumina could be the results of arbitration from the company’s contract dispute with Applied Biosystems. Illumina sued Applera, ABI’s parent, for breach of contract after ABI allegedly failed to hold up its end of a joint development agreement for a genotyping system. ABI countersued, alleging that Illumina was in breach of the agreement. ABI also has sued Illumina for patent infringement related to its oligo ligation assay.

But this legal cloud seems like a cotton ball compared to the troubles being faced by Illumina’s genotyping rival Sequenom. The company’s lone bright spot in the past few months has been its announcement Monday of an expanded collaboration with the US Department of Agriculture’s Agricultural Research Service to develop and validate a panel of genetic markers for swine identification, and place of one of its MassArray genotyping systems at ARS. The agreement is the only new collaboration the company has announced since reporting sagging first quarter earnings April 29. During its first-quarter conference call, Sequenom warned that the market for its MassArray systems was reaching saturation, and that sales cycles for the new benchtop MassArray system were “longer than planned.” As a result, the company’s stock price slid below the $2 range in early May, (See PGx Reporter 05-06-04) and has hit $1 per share in recent weeks (trading Wednesday afternoon at $1.18 per share). The company is slated to report its second-quarter earnings on July 29.

Schmidt said that a major part of Illumina’s success amid Sequenom’s struggles and that of other companies, is that the company is “outcompeting Sequenom for [genotyping] customers, probably based on superior technology,” which is “cheaper, and has a higher throughput potential.”

The next challenge for Illumina will likely be to see if its success can translate outside the genotyping area. The company is planning to release its whole-genome microarrays, the Sentrix Human WG-6 and Human RS-8 BeadChips, within the next few months. With a crowded microarray market, the company’s potential competitive edge is likely to be price, as it is offering whole-genome chips that query up to 8 different samples for as little as $100 per sample.

But Schmidt thinks that Illumina may be able to reach profitability in genotyping alone — at least in the short term. In addition to marketing its BeadStations, the comp-any is also slated to release its 100,000-SNP BeadChip in the coming months, which will eventually be followed by a chip-based product that contains the entire array of haplotype SNPs being characterized by the HapMap project, the comp-any has said.

“We continue to believe that this market is going to be explosive, particularly next year, when the whole genome [SNP] chips are on the market,” said Flatley.

— MMJ

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