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Solexa May Not Recognize Revenue From First Sales Until Q4; Revs Delayed Once Already

NEW YORK (GenomeWeb News) - Solexa said last week it may not recognize revenues from its first instrument sales to two early-access customers until the end of the year because it still has not met certain pre-agreed product specifications.
 
The company had originally planned to book receipts from early-access sales in the second quarter but in May pushed back that timeline to the third quarter.
 
Now, “we are anticipating that we will recognize revenue by year-end, possibly Q3, but possibly as well Q4,” said Solexa Chief Financial Officer Linda Rubinstein during a conference call last week. Rubinstein said the company will start invoicing early-access customers “when we have met the early-access product specifications, which we anticipate will occur later this year.”
 
But the problem holding up revenues appears to be more complex than originally thought: Solexa is “in the process of determining appropriate revenue recognition policies” with the help of outside accountants, Rubinstein said.
 
She added that “revenue recognition specific to early-stage technology, such as our early-access program, is more complicated than we expect it to be when we are selling more broadly to customers.”
 
In the meantime, the company said it is phasing out its MPSS genomic services and continues to prepare for a broader launch of its sequencing technology.
 
Since the end of June, Solexa has shipped three early-access units of its G1 Genome Analysis system to two customers – two to the Broad Institute and one to the Genome Sequencing Center at Washington University School of Medicine, GenomeWeb News has learned.
 
But these units “are not at that full performance level that we are targeting,” CEO John West said. The company is currently improving the instrument’s performance and robustness, using feedback from these customers so that it will be able to sequence more than 1 billion DNA bases per run by the end of the year, a level Solexa calls “1G.” West said this milestone will enable it to achieve the so-called $100,000 genome.
 
According to Chad Nusbaum, co-director of the Broad Institute's genome sequencing and analysis program, “We are in the process of taking the machines through a rigorous validation and implementation phase, which will allow us to, among other things, baseline instrument performance.”
 
It is only after reaching certain technical performance standards – negotiated individually with each early-access customer – can Solexa send out invoices. That will require a “variety of different types of optimization” of the instrument, West told GenomeWeb News. He declined to spell out the current performance of the instrument citing “competitive reasons.”
 
Last May, Solexa said it will delay recognizing revenue from early-access sales from the second to the third quarter. According to agreements between Solexa and these first customers, the company could book revenue only after early-access customers test the technology for several weeks and after Solexa and the customer complete some collaborative work.
 
Performance
 
West said in last week’s call that the company’s instrument “has generated results which make it the highest performance sequencing instrument in the world.” Asked by GenomeWeb News what these results were, he said the company prefers to present scientific and technical results at scientific conferences.
 
West also said Solexa intends to improve its technology further to cut sequencing cost beyond the initial $100,000 goal. “This is not a floor, but rather a level that we intend to pass through on the way down,” he said.
 
For example, the company will attempt to increase the amount of data it can obtain from each flow cell by increasing read length, enabling paired-end reads, and increasing cluster density. It also hopes to make hardware and software improvements in order to help increase the speed at which it scans flow cells.
 
Preparing for Broader Launch
 
West said he believes the transition between the firm’s early-access program and its broad commercial launch may ultimately be seamless. “I think that it would be a mistake to draw too sharp of a line between those,” he told GenomeWeb News last week. “We expect the technology to get better and better over time, even after the product is perhaps considered officially launched.”
 
Sales will increase over time, he said. “The units that we shipped already [to early-access customers] are shipped against customer orders, and we expect to ship more units against customer orders.”
 
What ultimately matters to the company, he said, is “how we are able to ramp up the revenue over time, and that depends on the performance relative to the individual customer’s expectation and the way that we are able to support that.”
 
West said Solexa has a “growing backlog” of orders, but would not comment on the actual number. Orders came from researchers within and outside the US, including sequencing and expression profiling labs and genome centers and industry users.
 
Over the last few months, Solexa has hired a trio of Applied Biosystems veterans to help bolster its manufacturing, field operations, and genomic services business. Last July, Richard Lussier joined Solexa as vice president of sales and field operations and Brock Siegel took the position of chief operating officer. Earlier this month, Frank Oaks joined the company as vice president for DNA sequencing services. West is also an ABI alumnus, having developed and launched the company’s flagship sequencer as vice president of DNA platforms.
 
Other hires Solexa has made in recent months in manufacturing, field operations, R&D, and other areas brought its headcount up to 163, one-third more than at the end of May. It is in the midst of hiring and training field operations personnel, including service engineers and applications specialists. Currently, Solexa has technical support personnel near the sites of its two early access customers, as well as near its two company locations – Hayward, Calif. and Cambridge, UK – West told GenomeWeb News.
 
In addition, Solexa announced an agreement with New England Biolabs this month, under which NEB will manufacture Solexa’s proprietary sequencing-by-synthesis polymerase and provide other reagents. This is the second deal with a reagent company Solexa has announced, the other being Invitrogen, which will provide reagents for Solexa’s sample preparation kits.
 
Earnings
 
As Solexa readies a broad instrument launch, its revenues for the second quarter — derived mostly from the MPSS service it is currently phasing out — have slid.
 
Revenues for the quarter ended June 30 declined more than 21 percent to $1.1 million from $1.4 million during the year-ago period. Around $134,000 in revenues in the period came from a UK government grant funding a computational biology project.
 
“MPSS activities are largely complete as of today,” Rubinstein said during last week’s call. However, contracts for some existing MPSS customers were converted to the new technology, and the company has new service contracts as well.
 
Toward the end of the year, Solexa plans to run pilot samples for genomic services based on the new technology, but it expects to see its service revenues fall even further this year because of a gap between MPSS-based services phasing out and services based on the new instrument ramping up.
 
The company’s R&D expenses for the quarter totaled $5.5 million, up from $4.7 million during the same quarter last year, resulting form a growing number of in-house instrument prototypes and personnel as well as some stock-based compensation. R&D costs will likely remain above 2005 levels this year and beyond, Rubinstein said.
 
Solexa also incurred, for the first time, startup manufacturing costs of $724,000 during the quarter as it “began to ramp manufacturing to produce machines and consumables,” Rubinstein said, and expects more of these costs until the end of the year.
 
The company’s net loss for the quarter amounted to $9.8 million, slightly more than during last year’s second quarter, when it was $9.4 million.
 
Solexa’s net burn for the second quarter was $10.4 million. As of June 30, Solexa had $58 million in cash and cash equivalents, “sufficient to meet our projected working capital and other cash requirements for at least the next 12 months,” according to Rubinstein.

Julia Karow covers the next-generation genome-sequencing market for GenomeWeb News. E-mail her at [email protected]

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