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Illumina Predicts Flat Future for Array Business as GWAS Decline Counters Growth in New Markets

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This story was originally posted on Oct. 24

Illumina is "optimistic" about its microarray business, believing that gains in applied markets such as cytogenetics and preimplantation genetic testing, as well as the introduction of "economical" arrays targeted to biobanks, will offset declining interest in genome-wide association studies.

Company executives described the San Diego vendor's position this week during an earnings call to discuss its third-quarter earnings. For the three months ended Sept. 30, Illumina's revenues increased 21 percent to $285.9 million from $235.5 million in the same period one year ago.

Much of that growth was driven by demand for the firm's sequencing products. CEO Jay Flatley said on the call that the firm's array-derived revenues were down 3 percent sequentially but did not provide a comparison to the year-ago quarter. He did say, however, that shipments for the company's iScan microarray instruments were the highest they have been in two years.

Though Flatley did not provide any additional detail on the performance of Illumina's array business in Q3, he said the firm anticipates growth in the business going forward, based on focused and custom products, such as its arrays for cytogenetics and the new family of HumanCore arrays the company launched earlier this month (BAN 10/16/2012).

Flatley said Illumina launched the new arrays to "provide a tool to perform large-scale, economical genotyping studies," noting that researchers have the option to customize content for a specific cohort or population.

However, he cautioned that any growth in the array business will be offset by a "continued reduction in the GWAS part of that business," adding that the firm is "not optimistic about the continuing drive to whole-genome studies." Given the combination of those two trends, Flatley said Illumina expects its array business to be "flattish to maybe up a little bit" in coming quarters.

'Another Building Block'

Flatley provided a positive outlook for the firm's arrays in the cytogenetics market. Earlier this month, Illumina acquired Cambridge, UK-based BlueGnome to "enhance its presence" in that market, and Chief Financial Officer Marc Stapley disclosed during the call that Illumina paid $88 million in cash to acquire the British company. The firm had previously not discussed the price of the acquisition (BAN 9/25/2012).

Flatley cited BlueGnome's 24sure preimplantation genetic screening test, its CytoChip arrays for detecting abnormalities associated with developmental delay and leukemia, its roster of 200 client laboratories, and its BlueFuse software in particular as benefits from the deal.

"We now have the software solution that we didn't have with our standalone array technology," said Flatley, "so we're very excited about implementing our arrays under the BlueFuse software capability."

He portrayed the acquisition as "another building block" toward Illumina's goal of "leading the genomics-based diagnostics market." He also acknowledged that Illumina is in "roughly third place" in that market, behind Agilent Technologies and Affymetrix, "about tied for where BlueGnome was." Agilent, however, manufactures BlueGnome's arrays, and Illumina said after the transaction closed that it will continue to honor BlueGnome's existing business agreements with Agilent (BAN 9/25/2012).

With BlueGnome as part of Illumina, Flatley now expects that cytogenetics will be a "much stronger market opportunity" for the company. He said that Illumina will benefit from BlueGnome's sales force, which is "fully directed towards IVF and cytogenetics labs," and said that Illumina's sales force "was not spending enough time on" these areas before the acquisition.

Going forward, he said that Illumina will "continue to build the sales force" devoted to cytogenetics and IVF in 2013, but "you will see revenue to match as well."

BlueGnome contributed $1 million in revenues to Illumina's total Q3 revenues. The company expects that the firm will contribute $5 million to revenues in the fourth quarter.

ENCODE

Flatley also touched on the impact of dozens of new papers published recently by members of the Encyclopedia of DNA Elements, or ENCODE, consortium. He said last month at an investor conference that the 30 papers, published in Nature, Science, and elsewhere, could have "significant implications" for the company (BAN 9/18/2012).

The firm's sequencing business is expected to benefit from the findings, but Flatley said this week that the ENCODE findings could also boost the company's array business.

"I think ENCODE has the potential to certainly help our sequencing business over a period of one year or two years," said Flatley. "There is tremendously valuable information outside the exons, and the science needs to get at that information and study it at large scale;" he said. "The best way to do that, of course, is to sequence the entire human genomes."

However, Flatley said that "there are some opportunities" for arrays as well, "because once we understand the specific points in the genome that matter outside the exons, whether these are switches or something going on in the regulatory regions, we have the ability to go back and put those on arrays."

Flatley said that the company is planning "some follow-on content arrays that could be quite interesting as a direct follow-on to what was learned in ENCODE and what we'll learn over the next year or so."

Q3 in Full

Illumina's 21 percent spike in Q3 revenues beat analysts' consensus revenue estimate of $284.8 million. During the call, Stapley said that product revenues climbed to $262.4 million from $220.3 million, and its service and other revenue jumped to $23.5 million from $15.2 million.

Instrument revenue for the third quarter was $82 million, up 15 percent year over year. Stapley said that the year-over-year increase was primarily due to the impact of the MiSeq desktop sequencing platform, which began shipments in Q3 2011.

Consumables revenue for the quarter was $177 million, up 22 percent year over year, but down 4 percent sequentially. Stapley said the sequential decline was due to two factors: reduced usage during the summer vacation season and positive impact on Q2 consumables sales due to an effort to reduce reagent backorders.

US shipments increased 19 percent year over year, Flatley noted during the call, and Canadian shipments were up 11 percent. European shipments were up 19 percent year over year, while Asia had growth of 21 percent, including 79 percent growth in China.

Illumina posted net income of $29.7 million, compared to a profit of $10.2 million for Q3 2011.

The firm's R&D spending increased around 7 percent to $54.1 million from $50.4 million, and its SG&A expenses climbed 6 percent to $69.8 million from $66 million.

Illumina finished the quarter with $343.1 million in cash and cash equivalents and $890 million in short-term investments.

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