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Illumina 'Confident' in Array Market Outlook Despite 3 Percent Dip in Q3 Chip Sales

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A drop in demand for Illumina's array instruments, coupled with a market preference for lower complexity, and therefore lower priced, chips, caused the San Diego vendor's array revenues to decline by 3 percent in the third quarter, Illumina executives said this week.

At the same time, the company's management said it is "committed" to the array market and provided a positive forecast for the business, citing "substantial demand" in the quarter for its genotyping services and orders for its Infinium products that already have already exceeded total 2012 orders.

In addition, Illumina expects "pent-up demand" for its newer array products, such as its Infinium HTS-24 arrays, which launched earlier this month. Using the HTS-24 chips, customers can analyze two dozen samples on as many arrays, each of which consists of 750,000 markers.

"We remain confident in the long-term outlook for the array market, which we believe will be bolstered by recent product introductions, including our updated Infinium arrays, which enable [the analysis of] 24 samples per chip," said President and CEO Jay Flatley. "By increasing the samples per array, we improve the economics to our customers and empower them to perform more studies based on even larger sample numbers."

Flatley discussed the company's business during its third quarter earnings call. Though array revenues fell slightly in the quarter, Illumina's revenues for the three months ended Sept. 30 jumped 25 percent, driven by demand for its sequencing-based research and clinical products.

While sequencing is Illumina's dominant business, Christian Henry, the firm's general manager of genomics solutions, said that Illumina is "committed to investing in the array platform." He said on the call that the 24-sample iSelect array "really opens up new markets," and that "there are a lot of different discussions in agriculture [and] in other areas that are ongoing that give us some sense of why this business will continue to be an important part of what we do going forward."

According to Flatley, such customers also contributed to growth in the firm's contract genotyping services business. In Q3, Illumina processed about 90,000 samples for agriculture, consumer, and research customers, a "new record and a trend that we expect to continue."

Remaining elasticity

While vendors like Illumina and Affymetrix have acknowledged several times in recent years that the adoption of sequencing for RNA expression profiling and genotyping, among other applications, has had a negative impact on array demand, they continue to see opportunities in other markets, such as consumer genomics and agricultural research.

This has led to a general market shift toward lower-complexity chips that are used to process ever higher numbers of samples. That means that Illumina is actually selling arrays to analyze more samples than ever before, but that the revenue generated is lower than it would have been for the kinds of higher-complexity, higher-margin arrays that were favored in the past.

"The array market trend is toward large sample numbers at lower complexity and thus lower [average selling price] per sample," Flatley noted on the call. "As a demonstration of this, year-to-date, Infinium sample orders have already exceeded the total level seen in 2012, as a result of demand for our Infinium, HumanCoreExome, and Omni Exome products."

In line with this trend, Flatley said that Illumina expects "pent-up demand" for its HTS-24 BeadChips, and is planning several product launches in that format. The first chip to ship in the new format is Illumina's HumanOmniExpress BeadChip. The company also expects to ship 24-sample versions of its custom iSelect, HumanCoreExome, and HumanCore BeadChips in the first quarter of 2014. Illumina launched the latter two "cost efficient" arrays for use in biorepositories, genome centers, and core laboratories last year (BAN 10/16/2012).

The company also will also launch its first consortium-designed array in the HTS-24 format. Illumina said earlier this month that the Infinium OncoArray-530K BeadChip, designed in collaboration with the OncoArray consortium, will enable researchers to study variants associated with five common cancers – breast, ovarian, colon, lung, and prostate. OncoArray consortium members plan to use the chip to analyze more than 425,000 samples in order to detect associations within and between cancer types (BAN 4/2/2013).

According to Illumina, the OncoArray will be available to non-consortium researchers in Q1 2014.

Though Illumina introduced the HTS-24 format earlier this month, it has "already been in dialogue with customers who are planning new large-volume [genome-wide association studies] enabled by this pricing," said Flatley. "The feedback reinforces our thesis that the array market has remaining elasticity, a theory that we plan to test by unlocking the portion of the market which demands lower price points, including biobank and large agricultural opportunities."

Another consortium-designed array is also on the horizon. Flatley said that Illumina will ship early next year a Psychiatric Genomics Consortium-designed array that is based on the company's HumanCoreExome BeadChip, but contains an additional 50,000 markers selected for psychiatric research. The "PsychArray" will be used to conduct genome-wide analyses on large sample numbers, Flatley said. He added that Illumina plans to take part in similar projects and that the company will launch "other targeted arrays." He did not elaborate.

Still, given market trends and the availability of these new, lower-priced products, the company anticipates array revenues to remain static in coming quarters, Flatley said.

"I think flat is the right place to have it," Flatley said. "It bounces around a little bit from quarter to quarter depending upon what happens in the consumer markets and other places," he added.

Financials and a market exit

Illumina this week reported total revenues of $357 million, up from $285.9 million reported in the third quarter of 2012 and beating the Wall Street consensus estimate for revenues of $343.6 million.

The firm's product revenues rose to $318.6 million from $262.4 million. Instrument revenue was $100 million, up from $82 million in the year-ago quarter, while consumable revenue increased 22 percent to $216 million from $177 million. Illumina's services and other revenue jumped 64 percent to $38.2 million from $23.5 million.

Illumina's sequencing business grew 37 percent driven by its HiSeq system and sequencing consumables.

Flatley also disclosed on the call that Illumina will exit the quantitative PCR market. By the end of the year, Illumina will cease selling its Eco real-time PCR instrument and PCR assays, but will "continue to provide service and support for the installed base for a customary period," he said.

According to Flatley, the company decided to exit the qPCR market to focus its resources on developing its other platforms. "Given the tremendous opportunities for our sequencing and array technologies, we need to continue to focus our R&D and commercialization priorities," he said.

Illumina reported net income of $31.4 million for the quarter, or $.22 per share, compared to $29.7 million, or $.22 per share, for the prior-year quarter. On a non-GAAP basis, its EPS was $.45 versus $.41 for Q3 2012 and above the consensus estimate of $.40.

The firm's R&D costs in the quarter rose by nearly a third to $71 million from $54.1 million, while its SG&A expenses increased around 37 percent to $95.6 million from $69.8 million.

Illumina finished the quarter with $1.03 billion in cash, cash equivalents, and short-term investments.

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