454 Life Sciences exceeded revenue targets for 2006 and is on track to become profitable next year, its parent company CuraGen said last week.
Although an inventory transition from the Genome Sequencer 20 to the newly launched FLX caused most of a 25-percent drop in 454’s instrument and reagent revenues in the fourth quarter, distribution partner Roche had a “record quarter” for instrument sales, CuraGen said.
The company also reiterated that a review of strategic options for 454 that began last summer was “ongoing” but did not provide any further information.
By the end of this year, CuraGen expects 454 to be profitable for the first time, with projected net income of $1 million to $3 million for the year.
While 454’s overall fourth-quarter revenues dipped only 2 percent to $8.9 million, from $9.1 million in the fourth quarter of 2005, sales of sequencing instruments and reagents fell 25 percent to $4.8 million, from $6.3 million in the prior-year period.
The drop in instrument and reagent sales happened “as we began transitioning inventory from the GS 20 system over to the GS FLX,” 454’s CEO Chris McLeod said during a conference call last week.
454 recognizes revenues after selling instruments and reagents to Roche at a transfer price, he explained. Roche, which keeps an inventory of the machines, then sells them to customers and passes additional royalties on to 454. Roche’s demand for additional GS 20 instruments was smaller in the last three months of 2006 than in the fourth quarter of 2005, a 454 spokesman told In Sequence last week.
In addition, he said, during the last quarter of 2005, 454 still sold a small number of instruments directly to customers — even though the marketing and distribution agreement with Roche officially started in October of 2005 — so the company recognized more revenue for those than for the instruments it sold to Roche.
Roche did not experience a slow-down in instrument sales in the fourth quarter. On the contrary, “the fourth quarter marked the largest number of instruments sold in a single quarter to date by Roche,” McLeod said.
In total, Roche placed more than 40 Genome Sequencers in 2006, more than tripling the installed instrument base, which has reached more than 60 by now at sites in North America, Europe, Asia, and the Pacific Rim, McLeod said. These include both GS 20s and GS FLXs, according to the 454 spokesman, but the company did not break down how many of each type it has sold.
At present, Roche is upgrading its GS 20 customers to the GS FLX. The cost for the upgrade “will be determined by Roche with the customers,” said McLeod last week, adding that “we expect it to average less than $100,000.” The new GS FLX has a list price of $500,000, he said.
In addition to instrument and reagent revenues, 454 derived $2.5 million in sequencing services revenues for the quarter ended Dec. 31, 2006, up from $970,000 during the year-ago quarter.
454’s service business plays an important role in familiarizing potential customers with the technology, according to CuraGen CEO Frank Armstrong. A number of potential buyers first tested the technology by paying for a sequencing project through 454’s Measurement Services Center, he explained, “so it’s obviously an important part in the marketing mix.”
“The fourth quarter marked the largest number of instruments sold in a single quarter to date by Roche.”
$1.2 million of 454’s revenues came from milestones, up from $920,000 in the year-ago period. The company also recorded $390,000 in revenues from collaborations for the fourth quarter of 2006. 454 did not have revenues from collaborations during the fourth quarter of 2005, but recorded $850,000 in grant revenue.
For the full year, 454’s revenues essentially doubled, to $37.3 million, from $18.7 million in 2005, exceeding CuraGen’s expectation. A year ago, CuraGen had predicted its majority-owned subsidiary would bring in $30 million to $35 million in revenues in 2006.
CuraGen did not disclose 454’s net loss for the fourth quarter or for the full year. But according to SEC filings, 454 recorded a net loss of $2.65 million in the first quarter of 2005, which it narrowed to $1.71 million by the third quarter of 2006, the most recent quarter for which figures are available.
This year, 454 is expected to see a significant increase in revenues again, making the subsidiary profitable for the first time. “With the GS FLX, we feel we can hit $50 million to $55 million in revenues during 2007,” said McLeod last week. “At that level, we expect to hit a major milestone and potentially operate in the black.”
Since 454 sold its first Genome Sequencer instruments in early 2005, its revenues initially surged, hovering between $8.75 million and almost $10 million in each of the last 5 quarters, during which Roche was its sole distributor (see chart).
But CuraGen’s guidance on 454’s business for the full year of 2007 does not mean the company has decided to keep the unit, in which it has a 66-percent stake. “Should CuraGen make any changes to our portfolio of products, or should we make a realization from the 454 asset, then it would be our intent to recast the 2007 guidance,” said Armstrong in response to an analyst’s question. “So I will encourage you not to read anything into the consolidated guidance for 2007,” he added.
However, Armstrong had no news about its strategic evaluation of its stake in 454, which it announced last summer.
At that time, CuraGen said it has started looking for “strategic options” for 454 in order to secure funding for is own oncology drug development and for 454’s growth.
“What I can say today is that we are continuing to make good progress,” Armstrong said last week. “However, at this moment, it would be inappropriate to provide any further details which may compromise the ongoing process.”