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Illumina's Array Business Flat in Q2 as Demand for Exome, Ag Chips Offsets Decline in GWAS

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This article was originally posted on June 25.

New orders for Illumina's exome arrays continued to propel the company's chip business in the second quarter, despite a "downward trend" in demand for its whole-genome genotyping arrays, once the San Diego company's flagship array business.

CEO Jay Flatley said this week during an earnings call that Illumina booked orders for enough arrays to process 250,000 samples in Q2, and said that since Illumina rolled out its exome arrays at the end of last year, customers have ordered enough chips to process 1.6 million samples, "by far the highest number of samples for any content collection in the company's history."

Indeed, Illumina reported a 16 percent increase in sales of consumables across all of its core businesses — arrays, next-generation sequencing, and PCR — but still posted a 2 percent drop in revenues for the three months ended June 30 compared to the same period in 2011, largely due to a 32 percent decline in instrument revenues.

Despite this, Flatley noted that orders for new iScan and HiScan systems were the "highest since Q2 2011," and said the firm saw orders increase in a number of consumable products in addition to its exome arrays, including its menu of agricultural biotechnology-focused arrays, such as its Bovine LD, PorcineSNP60, and MaizeSNP50 BeadChips. Demand also increased for the firm's custom OmniExpress chips.

Furthermore, the company's CytoSNP-12 product had its "second best quarter ever," Flatley said, adding that Illumina remains on track to submit the cytogenetics tool to the US Food and Drug Administration for 510(k) clearance later this year in the same time frame that Illumina's competitor, Affymetrix, also hopes to submit its CytoScan HD chip to the agency for clearance (BAN 6/26/2012).

The sole weak spot for Illumina's array business appears to be its whole-genome genotyping chips, which are used in genome-wide association studies. "I think whole-genome association type chips are trending downward, but that's made up for by the positive trend lines in the exome chip, where we continue to have tremendous success," Flatley said. "We've had really positive trend lines from some of the ag chips as well, and the custom business continues to do well," he said. Because of the upward and downtward trends in different segments of its array business, Flatley characterized the business as "roughly flat."

Demand for Illumina's exome arrays caught the firm off guard. Christian Henry, general manager of Illumina's genomic solutions business, told investors in May that the company originally thought that if it saw demand for 100,000 samples for its exome arrays, it would be a "productive product," adding that the firm "dramatically underestimated the power of the market" (BAN 5/15/2012). Illumina introduced its exome family of arrays last year. It now offers four chips containing exonic content: the HumanExome BeadChip, the HumanOmniExpressExome BeadChip, the HumanOmni2.5Exome BeadChip, and the HumanOmni5Exome BeadChip (BAN 10/18/2011).

'Macro Uncertainty'

Though Illumina's Q2 results were slightly down year over year, Flatley said that he was "pleased" with the firm's performance, and said that the company is well positioned ahead of "macro uncertainty" expected in the second half of the year. Flat or declining public spending on research, both in the US and abroad, cost the company last year. Third-quarter 2011 revenues fell 1 percent compared to Q3 2010, array sales dropped 9 percent, and the company suspended making financial forecasts indefinitely (BAN 10/25/2011).

Flatley said this week that in the US, the "overall funding dynamics" are "more favorable" than last year, and that the company's academic customers, who hesitated to place orders given uncertainty over future federal funding, are "better prepared" for budget challenges and are "planning accordingly."

Last August, the US Congress voted to expand the country's debt ceiling in order to avoid going into default. The deal authorized a bipartisan committee to find ways to cut $1.2 trillion from the deficit over the next 10 years, but the panel was unable to reach an agreement. An 8-percent, across-the-board funding reduction, known as sequestration, is scheduled to begin in January if Congress doesn't find other ways to cut the deficit.

Flatley this week reiterated the firm's position that sequestration is an "unlikely scenario" for the 2013 federal budget, and instead pointed to several indicators that the NIH budget will be roughly flat with the 2012 budget. Additionally, he noted that Illumina is less exposed to federal funding cuts as the firm's "customer mix" evolves toward more "commercial, clinical, and applied accounts."

Abroad, Flatley said that the firm did not see a "material change" in Europe, but said that Illumina's business on the continent "remains stable," as sequential shipments to Spain and Italy, two of the economies in the EU hit hardest by the recession, increased in Q2. Shipments to other markets were similarly up, rising 18 percent in the US, 15 percent in Canada, and 50 percent in China, year over year. Shipments in Brazil were up 100 percent year over year. Illumina opened an office in São Paulo, the largest city in South America, last year, and Flatley said that Brazil is now among the top dozen countries to which Illumina ships its products (BAN 1/25/2011).

'Earnings Momentum'

Though Illumina's revenues shrank 2 percent in Q2, the firm's executives said they were "pleased" with the performance, as it beat Wall Street estimates.

For the three months ended July 1, Illumina had revenues of $280.6 million, compared to $287.5 million a year ago, and above an average analyst forecast of $278.7 million. Product revenues fell to $258.8 million from $269.9 million a year ago, while service and other revenues rose to $21.8 million from $17.6 million.

Marc Stapley, the firm's chief financial officer, said on the call that instrument sales of $72 million were down 32 percent year over year with decreases in both sequencing and array instrument sales. At the same time, he noted that consumables sales now comprise 65 percent of total revenues. Consumable revenue for the quarter was $184 million, up 16 percent compared to the second quarter of 2011.

"We have continued our positive revenue and earnings momentum with our third consecutive quarter of sequential growth in both revenue and earnings per share," said Stapley.

R&D expenses during the quarter increased 40 percent to $71.2 million from $50.8 million during the second quarter of 2011, while SG&A expenses were down 1 percent to $68.5 million from $69.2 million in the year-ago period.

Illumina's profits for the quarter dropped to $23.4 million from $30.6 million a year ago and Illumina exited the quarter with $316.4 million in cash and cash equivalents.

In a statement, Flatley said Illumina is reaffirming 2012 revenue guidance of between $1.1 billion and $1.18 billion.

"We are very pleased with our operational execution for the first half of 2012 and the resulting financial performance," Flatley said in statement. "While some uncertainty exists with respect to academic and research funding in the second half of the year, our outlook is generally as we anticipated."

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