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Illumina's Q2 Sales Rise 36 Percent on Sequencing Demand, 'Overall Improvement' in Array Sales

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This story was originally posted on July 27.

By Justin Petrone

Illumina last week reported a 36-percent spike in second-quarter revenues driven by "strong demand" for its next-generation sequencing products and restored growth in its array business, particularly for whole-genome genotyping chips.

It also said it expects full-year 2011 revenue to increase as much as 26 percent over 2010, causing annual revenue to hit the billion-dollar mark for the first time in its history.

Total sales for the three months ended July 3 jumped to $287.5 million from $212 million for Q2 2010. Product revenue rose to $269.9 million from $198.5 million year over year, and service and other revenue increased to $17.6 million from $13.5 million.

"Revenue growth was driven by strong demand for our sequencing products and overall improvement in our array business," Christian Henry, Illumina's chief financial officer and general manager of its Life Sciences Business unit, said during the company's earnings call.

Illumina's consumables revenue increased 26 percent to $159 million from $126 million while receipts from instrument sales rose 53 percent year over year to $107 million. Henry attributed the growth to shipments of the company's HiSeq sequencing instruments and its HiScan and HiScanSQ array systems.

R&D expenses rose 16 percent to $50.8 million from $43.7 million, while SG&A spending increased 30 percent to $69.2 million from $53.1 million. Net income for the quarter widened to $30.6 million from $29.8 million for Q2 2010.

Illumina finished the quarter with $261.1 million in cash and cash equivalents and $972.8 million in short-term investments. For full-year 2011, the firm said it expects revenue to rise between 24 and 26 percent to about $1.1 billion from FY 2010 total revenues of $902.7 million.

'Cautiously Optimistic'

While Illumina's sequencing revenues increased 53 percent year over year, due primarily to sales of HiSeqs, its array business continued to rebound.
During the call, CEO Jay Flatley said that the firm's microarray revenues grew more than 10 percent year over year, which he attributed to consumables growth across its array products, particularly whole-genome genotyping arrays for genome-wide association studies.

"We shipped more samples of GWAS arrays than in any other quarter in our history," Flatley said. He added that demand also rose for its custom-content and focused-content arrays.

Illumina last week began shipping its four-array HumanOmni5-Quad DNA Analysis BeadChip, which features more than 4.3 million variants per sample selected from the International HapMap Project and the 1000 Genomes Project. Users also have the option to add up to 500,000 custom markers.

The array follows the launch of the Omni2.5 BeadChip in June 2010, which bolstered the firm's array sales in subsequent quarters (BAN 11/2/2010).

Illumina is hoping that successful new association studies powered by the rare-variant chips will revive the GWAS market, which has been sluggish in recent years. Flatley said that the company's outlook for that market "remains cautiously positive" and that he expects to see the results of several proof-of-principle studies later this year.

"We continue to believe that novel findings with rare-variant content will renew demand for GWAS," Flatley said during the call.

Still, he said that it was unlikely that the launch of the Omni5 would give the firm the same boost in the third quarter that the Omni2.5 provided during the same period last year. He said that those early adopters who were interested in accessing rare-variant content have already begun using the Omni2.5, making them less likely to move on to the Omni5.

"I think we'll see somewhat less of a pop [in demand] because we don't have quite the pent-up demand for the 5" as there was for the 2.5, said Flatley. "And the reason is that many of the customers who wanted to get this initial first taste of rare-variant content did that with the 2.5. The extra content on the 5 is, of course, meaningful and valuable, but it's not quite as valuable as that initial step was for the Omni2.5.

"For that reason, we think there'll be less of an initial pop in comparison of the two," Flatley added.

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Meantime, microarray instrumentation sales grew due to an increase in shipments of Illumina's HiScan and HiScanSQ systems, Flatley said, without elaborating.

Those placements are also providing a boost to consumables sales. Henry said that "consumable pull-through" across Illumina's installed base of microarray scanners has been in the range of between $400,000 and $500,000 per system per year.
"Both whole-genome and custom arrays contributed to this growth," he said.

The rise in adoption of sequencing has also had a beneficial impact for the firm's array business. Flatley said that the company initially thought that customers would move from arrays to sequencing, but that some first-time sequencing customers are also adopting arrays.

"Our initial thought was that it was largely going to be array customers who are migrating towards sequencing," said Flatley. "I think what we're seeing is at least as many customers come at it from the sequencing side and then do occasional array use. That part has been a bit of a surprise to us and probably … counts in part for the reason for our overperformance … in the last six to nine months in terms of ScanSQ" placements.

Regional Perspective

In terms of geographies, Illumina saw stronger overall demand in Europe and in Asia than in North America. Earlier this month Affymetrix, the firm's main competitor in the genotyping-array market, cited weak sales to academics, particularly in North America, as one of the reasons it expects second-quarter revenues to fall by between 9 percent and 11 percent year over year (BAN 7/12/2011). Affy will report its Q2 earnings later this week.

While Illumina's sales in North America, and in the US in particular, were weaker than in other markets, the impact apparently was not highly pronounced.

"Because of the delay in getting the 2011 federal budget approved, we saw researchers that were not exactly sure how much funding they were going to get in the first quarter and into the second quarter, Flatley said of the US market, "so they were just delaying their spending a bit. Despite that, we think we did pretty well in Q2."

Meantime, in the Asian market, the firm was "pleasantly surprised" with its performance in Japan during the quarter.

"We thought there might be a little bit of risk there," he said, alluding to the Tōhoku earthquake and tsunami in March, but the company "did just fine" in Japan in the second quarter.

Moving on to China, Flatley called the market a "huge opportunity." He noted that the firm's largest customer there is BGI, which has ordered 128 HiSeqs from the firm to date, but "outside of that one customer, the opportunities are enormous in China in the long run."

Flatley said he believes Asia may have performed better than other regions on a relative basis because its funding environment is fairly secure.
Describing the European market, Flatley said Illumina had a "surprisingly strong performance, particularly on the order side." He did not elaborate. The company did not provide any additional regional-sales details.


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