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With 15 GB on GA II and Avantome Buy, Illumina Confident in Next-Gen Battle

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Illumina said last week that it saw “continued strong demand” in the second quarter for its Genome Analyzer II, which now generates up to 15 gigabases of data per run at the company.
 
As part of its second-quarter financial report, the company also said that it will acquire Avantome, a privately held company developing a low-cost, long-read sequencing technology (see related article, this issue).
 
During Illumina’s second-quarter earnings call last week, CEO and President Jay Flatley said that internally, through improvements in chemistry and software, the company is now able to generate 15 gigabases of sequence data per run on its Genome Analyzer and has “clearly defined a roadmap to reach 20 gigabases or beyond by the end of this year.”
 
The company is “routinely achieving throughput levels greater than 10 gigabases per run,” he said.
 
Illumina has internally sequenced a mother-father-son trio of HapMap samples of African origin, he reported, generating more than 30-fold coverage. Sequencing runs for that project “routinely generated 7.5 gigabases of data and yielded up to 10 gigabases of data” using 50-base paired-end reads, he said.
 
Illumina’s aim is to enable existing customers to obtain 10 gigabases of data before the end of the year “and moving on beyond that shortly thereafter,” Flatley said.
 
Some genome centers will already be able to obtain more than 10 gigabases per run early this summer, according to chief financial officer and senior vice president Christian Henry, while other customers, who might not need the same output immediately, will get it “later in the fall or in the winter.”
 
The company has also developed a new sequencing reagent kit, which contains nine instead of 27 tubes and “greatly simplifies customer workflow,” Flatley said.
 
The kit will be commercially available in the third quarter and will be manufactured at Illumina’s new reagent facility in San Diego. That facility, Flatley explained, has a “very high-throughput robotics system to make the kits,” which “improves the overall quality … and it also allows us to scale very rapidly if we need to.”
 
Before the end of the year, Illumina also wants to introduce a kit for multiplexing samples, he said, adding that some customers have already developed their own solutions for multiplexing.
 
Flatley also addressed the uptake of recent upgrades, in particular the Genome Analyzer II, which it launched during the first quarter, and the paired-end module, which it started selling in mid-April (see In Sequence 4/29/2008).
 
Most of Illumina’s existing customers have by now ordered upgrades for their platforms, which turn them into Genome Analyzer IIs, and “we believe that most of the original Genome Analyzers will be upgraded to GA IIs by the end of this year,” Flatley said.
 
During the second quarter, the company sold more than 150 paired-end modules, he added, and expects “that virtually every Genome Analyzer in the field will ultimately include one.”
 
At the moment, researchers can use these to generate paired-end reads with 200-base inserts. At the end of the summer, the company plans to commercialize a long-insert protocol for insert sizes ranging from 2 to 4 kilobases, he said.
 
Ramping Revenues
 
Flatley also commented on revenues it derives from the Genome Analyzer. Sequencing consumables revenues have increased by more than 50 percent from the first to the second quarter of this year, and the company now has “a large enough installed base and sufficient data to feel confident” that each system will generate $150,000 to $200,000 in annual consumables revenues.
 
The new reagent kit, which is easier to manufacture, will further improve consumable gross margins, he said.
 
Although Flatley declined to reveal how many GA systems the company installed during the second quarter, he said that two-thirds of shipments had gone to customers outside of genome centers.
 
Ten percent of sequencing revenues came from corporate customers, he said, and pharmaceutical and biotech companies are an important, though not a dominant, part of the business. “Our view is that every research center for a pharma company is going to have one or a couple of next-gen sequencers,” he said. However, “you are not going to see pharma ramp up to operate like a genome center, having 10 or 20 systems.”
 

“I think there is going to be a back-and-forth battle.”

Flatley said Illumina is confident it can satisfy customer demand for the system. He said that the company manufactures the instruments at a factory in the Bay Area and is able to scale up easily if demand picks up. Henry added that the company has been “getting more efficient at manufacturing the GA II” since it started selling the system in the first quarter.
 
In terms of system applications, Flatley said that the company has witnessed “an increase in digital counting applications that continue to expand the market potential beyond traditional sequencing applications.”
 
About 50 percent of customers run gene expression applications on the system and “next-generation sequencing will become increasingly cost-competitive with traditional array-based methods,” he said.
 
For measuring expression of a subset of genes, the cost of using sequencing is already “about the same range” as using microarrays, he said, though the data quality from sequencing would be better.
 
Whole-genome transcriptome sequencing is still more expensive than array-based gene expression analysis, “but we think over the next 12 to 24 months, because of the improving throughput, the ability to do tagged applications, and a general reduction in sequencing costs, that is going to be approximately [the same as] array prices for much richer data,” he said.
 
Full transcriptome sequencing is a “killer application,” he said, because “you catch things that arrays would never catch.”
 
Other applications, such as methylation analysis and copy number variation analysis, are also gaining traction, he said.
 
Regarding the overall market, “We continue to believe that demand for sequencing over the next few years will be very robust,” Flatley said.
 
Projects like the 1000 Genomes Project and the Cancer Genome Atlas “will illustrate the application of next-generation sequencing as a high-powered discovery tool,” he predicted.
 
In addition, “over the next few years, we expect sequencing to become increasingly important as a diagnostics tool,” he said, without elaborating.
 
‘Formidable’ ABI
 
In response to an analyst’s question, Flatley addressed the competition with ABI’s SOLiD system head-on.
 
“We think that our competitor in this market is going to be very formidable, and we are prepared for that,” he said.
 
Illumina’s system, he claimed, still has a number of performance advantages over ABI’s SOLiD 2.0, including requirement of less starting material, ease of sample preparation, easier back-end data processing, and “much” faster run times.
 
Regarding the two systems’ throughputs, “I think there is going to be a back-and-forth battle,” Flatley said. As throughput per run climbs beyond 20 gigabases, “whether somebody is 2 gigabases or 4 gigabases ahead of the other player in any given month is probably not going to be the determining factor for who wins in this marketplace,” he said.
 
He also commented on the pending acquisition of ABI by Invitrogen, saying that “that combination probably makes some sense in the long run. We are assuming that they put those companies together well, and that they will continue to be very competitive with us.”
 
Flatley confirmed that Invitrogen provides Illumina with components for its sequencing reagent kits and will continue to do so, “but most of the kit work is done by Illumina and has been done previously by Solexa,” he said.
 
Q2 By the Numbers
 
Illumina reported $140.2 million in total revenues for the quarter, up almost 70 percent from $84.5 million in the second quarter last year.
 
According to Henry, year-over-year growth was “well balanced” and Illumina’s sequencing and microarray businesses contributed about equally to the top-line performance.
 
$129 million of revenues came from product sales, a 73-percent increase year-over-year.
 
Of that, $82 million came from consumables, 78 percent up from $46 million during the year-ago period. Growth in consumables resulted primarily from sales of Infinium HD chips.
 
Instrument revenues totaled $43 million, up 70 percent from $25 million last year, and were driven by “continued strong demand” for the Genome Analyzer II, according to Henry.
 
Services and other revenue, which includes sequencing and genotyping services as well as instrument maintenance contracts, totaled $12 million for the quarter, up from $10 million during the second quarter of 2007. Flatley said that the company is “going to become more and more active in the sequencing services [market].”
 
R&D expenses for the second quarter increased to $23.5 million, from $18.2 million during the same quarter last year.
 
SG&A expenses increased to $35.6 million for the quarter, up from $23.3 million during the second quarter in 2007.
 
Illumina’s net income for the quarter was $15.4 million, up from a profit of $9.3 million during the year-ago quarter.
 
Illumina ended the second quarter with $133 million in cash and cash equivalents, and $170.3 million in short-term investments. 

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