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Amid Declining Revenues, Illumina Plans to Restructure, Focus on Clinical Market

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By Monica Heger

Illumina is planning a restructuring that will include "the creation of a new business unit that will be focused specifically on the clinical markets," CEO Jay Flatley said during a conference call to discuss the company's third-quarter results today.

Illumina will begin implementing its restructuring plan "shortly," Flatley said, but did not elaborate other than to say that the company will provide further details "soon."

The company expects to incur restructuring costs of $15 million to $17 million, the majority of which will be recorded in the fourth quarter.

The restructuring comes amid declining revenues and profits for the company, which warned earlier this month that it expected to miss third-quarter revenue projections, citing uncertainty in the academic funding environment, a slower-than-expected uptake of the HiSeq 2000, and reduced reagent use for its sequencing instruments (IS 10/11/2011).

As expected, Illumina's revenues for the quarter ended Oct. 2 fell 1 percent to $235.5 million from $237.3 million in the third quarter last year. The company's sequencing and microarray business were both "significantly impacted by uncertainty over research funding in Europe and the US," Christian Henry, the company's chief financial officer, said during the call.

Product revenues fell 2 percent to $220.3 million from $224.7 million, while service and other revenues increased 20 percent to $15.2 million from $12.6 million.

In the US, a combination of funding factors contributed to the disappointing results, said Flatley, including the reduced 2011 National Institutes of Health budget, the potential 1 percent reduction to the National Cancer Institute and the National Human Genome Research Institute 2012 budgets, and the recent 20 percent reduction to select genome centers (IS 10/4/2011).

Illumina's instrument revenue was $72 million, down 18 percent over last year's third quarter and 33 percent sequentially, in part due to a decline in customers upgrading from the Genome Analyzer to the HiSeq, which drove significant volume in the year-ago quarter, but not this year.

One bright spot for the firm is the Illumina Genome Network, which took orders for 950 whole genomes during the quarter, including 500 orders from Stanford University and 450 from an undisclosed large biotechnology company. Officials did not break out third-quarter IGN revenues.

Additionally, the BC Cancer Agency has joined the network as the latest provider of Illumina sequencing services.

Clinically Focused Business Unit

The company has suspended its guidance for the full year, citing the ongoing uncertainty surrounding government funding. Though officials said they expect revenues to be higher in the fourth quarter than in the third quarter, the company is proceeding cautiously and tightening its belt.

"Taking a hard look at our cost structure, we think it's important to align it with planned revenue," Flatley said.

However, he added, "there will be no basic change in our strategy."

As part of the restructuring plan, the company will build a new business unit focused on the clinical market and customers doing clinical sequencing.

Flatley did not provide details on the new business unit, but said that it will develop products and provide services tailored to customers in the clinical market.

These customers have "different requirements" than customers in the research market, Flatley said, such as different software and reagents, a need for greater professional services, and help in building reference applications.

The new business unit "will help us take advantage of the impending growth of that market," Flatley said.

Additionally, Flatley said the clinical and diagnostic sectors offer the "potential to get higher pricing because we add more value."

For instance, the company's Hayward, Calif., facility recently achieved certification from the International Organization for Standardization to design and manufacture medical devices, which will "help pave the way to achieve [US Food and Drug Administration] certification for our sequencing instruments," Flatley said.

Flatley said he expects both the HiSeq and the MiSeq to be used in the clinical space — the MiSeq for targeted applications, and the HiSeq for applications like trisomy diagnosis or cancer sequencing projects.

He cited Sequenom's recent launch of its MaterniT21 Down syndrome test, which runs on the HiSeq, as a demonstration of the platform's utility in the clinical space.

Illumina also plans to expand its newly launched BaseSpace cloud-based analysis system to handle data from the HiSeq, although Flatley did not provide a timeline.

The system currently works only with MiSeq data but Flatley said that expanded support for the HiSeq will facilitate collaborations between customers for things like large-scale cancer sequencing projects, because data can simply be stored and shared in the cloud.

Excess Capacity

Illumina reiterated previous statements attributing the drop in third-quarter revenues to excess sequencing capacity driven by the launch of the V3 chemistry, which increased HiSeq throughput three-fold.

Flatley said that part of the problem was in underestimating not the factor of the increase, but the absolute level of increase. For instance, a three-fold throughput increase to 30 gigabases from 10 gigabases would result in customers sequencing to a greater depth or sequencing more genes, he said.

But with a throughput increase to 600 gigabases from 200 gigabases, "now we're dealing with increments of complete genomes," he said. To make use of that increase, customers need access to more samples, which was "probably a dynamic we underestimated," he said.

The company is currently working with customers to help them gain access to more samples, where possible, and is also working to make the sample-prep process easier to reduce front-end bottlenecks, Flatley said.

He stressed that the excess capacity is not due to a diminished interest in sequencing. "We believe there is an insatiable demand to get things sequenced," he said.

Another factor is that the increased throughput with the V3 chemistry caused customers to use fewer GA reagents. Since the cost of sequencing on the HiSeq is so much lower than on the GA, Flatley said, it's safe to assume that customers with both instruments will not use the GA unless the HiSeq is running at full capacity.

Looking ahead, Flatley predicted that the excess capacity "will be absorbed over the next few quarters."

He said the company is in constant contact with the genome centers to keep track of their consumable order rates and instrument use.

Additionally, he said, while whole-exome sequencing has been the primary application and right now it is the "area that is growing the fastest," as sequencing costs continue to drop, researchers will switch to whole-genome sequencing.

Flatley added that the company will apply lessons learned from the V3 launch to future product upgrades. "We're at less of a race to launch everything as quickly as possible," he said.

As opposed to incremental upgrades that may cause customers some "disruption," he said the company will deploy products in a "more rational way," bundling software and reagent releases together, for instance.

Financials

Illumina posted a 43 percent decline in net income to $20.2 million from $35.4 million in the third quarter of 2010.

The decline in income was in part attributed to an increase in spending. R&D spending increased about 13 percent to $50.4 million from $44.8 million, and selling, general, and administration expenses rose to $66 million from $55 million. Part of that increase is attributable to an increase in non-cash stock compensation expense in the third quarter of this year compared to last. Excluding those expenses, R&D expenses represented 17.4 percent of revenue, or $41.8 million, compared to 15.7 percent, or $38.3 million in the prior year period.

The company ended the quarter with $229.8 million in cash and cash equivalents and $902.3 million in short-term investments.


Have topics you'd like to see covered by In Sequence? Contact the editor at mheger [at] genomeweb [.] com.

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