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HiSeq Sales Boost Illumina's Q3 Revenues, but Order Backlog Will Take Several Quarters to Fill

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This article was originally published Oct. 27.

By Julia Karow

Illumina said last week that demand for the HiSeq 2000 continued to exceed its expectations during the third quarter, prompting it to further increase production of the instrument.

The company is also updating its portfolio of sequencers: It launched the HiSeq 1000, a single-flow-cell version of the HiSeq 2000, and reduced the list price for the GAIIx. In addition, it will discontinue the GAIIe, a lower-throughput sequencer the firm introduced earlier this year.

Illumina also made $31 million worth of strategic technology investments during the quarter, details of which it did not disclose.

During a conference call to discuss the company's third-quarter earnings, Illumina's president and CEO Jay Flatley said that sequencing revenues grew by more than 50 percent year over year, and sequencing-related orders increased by 70 percent, driven by strong demand for the HiSeq 2000.

"The breadth of the market opportunity for HiSeq continues to exceed our expectations," he said. HiSeq customers, Flatley said, "are generating excellent data with throughput levels that consistently exceed the product's specifications."

Forty percent of HiSeq shipments during the quarter went to major genome centers, including BGI and the Broad Institute, but little more than 10 percent of HiSeq Q3 orders came from these centers, indicating that the platform is starting to reach smaller labs. Specifically, the company is seeing demand from academic labs, agricultural firms, and industrial labs. It continues to believe that pharmaceutical companies will not mount large-scale in-house sequencing discovery programs, though their research labs "will need access to next-generation sequencing," Flatley said.

Excluding genome centers, 30 percent of HiSeq shipments during the quarter were trade-ins for Genome Analyzers, which, like in the second quarter, reduced the company's growth margins, a trend that will continue through at least the remainder of the year.

To satisfy demand for the HiSeq 2000, Illumina increased its manufacturing output for the platform by more than 70 percent in the third quarter, and it plans to expand production further by an unspecified amount during the remainder of the year.

Nevertheless, it will take the company several quarters to catch up with its backlog of orders, Flatley said.

In addition, high demand for the HiSeq has constrained manufacturing of the HiScanSQ, a platform that Illumina introduced earlier this year to analyze both microarrays and sequence DNA (IS 3/23/2010), which uses many of the same components as the HiSeq. In order to serve its HiScan and HiScanSQ customers, Illumina plans to "significantly ramp HiScan manufacturing" during the fourth quarter, Flatley said.

As the HiSeq 2000 is becoming increasingly popular, the company has decided to overhaul its portfolio of sequencers. Last week, it introduced a smaller version of the HiSeq 2000, the HiSeq 1000, which has half the throughput and is priced in the mid- to high-$500,000 range (see other article, this issue).

Illumina will also discontinue the Genome Analyzer IIe, a smaller version of the GAIIx that it launched at the beginning of the year (IS 1/19/2010). That instrument had a list price of $250,000 and an initial output of 20 gigabases per run.

In addition, it is lowering the list price of the Genome Analyzer IIx, which produces up to 95 gigabases per run, to under $300,000, which includes the paired-end module. It is also offering refurbished GAIIx systems from trade-ins at an even lower price. The company recently struck a partnership with used equipment vendor SeqGen for GAIIx resales (IS 10/26/2010).

"We feel that this portfolio is the most effective way to provide [sequencing-by-synthesis] sequencing technology to the broadest range of customers," Flatley said.

In response to an analyst's question about the market for lower-throughput next-generation sequencers priced at $150,000 or below — the anticipated price of Life Technologies' forthcoming Ion Torrent Personal Genome Machine — Flatley said that this is "certainly a very interesting market segment, particularly as we begin to see the remaining installed base of [capillary electrophoresis] systems looking to move over to next-generation technology. It's certainly a marketplace that we are looking at, we think it's an interesting one, but we don't have any particular product offerings to talk about in that space today."

Interest in the human whole-genome sequencing service for researchers that Illumina launched this summer through its Illumina Genome Network (IS 8/3/2010) has been "significant" and the company has so far booked multiple orders, Flatley said. These orders came from consortia and industrial companies, and involve "more one-off projects or project where [customers] don't know necessarily what they are going to do next after they sequence an initial bolus of genomes," he said.

Flatley said Illumina is pricing the service competitively but expects it to be profitable. "We intend to be aggressive in this marketplace and to be the strongest player in this market." The company has not disclosed pricing information for the service, which is provided by Illumina through subcontracting partners.

He also provided an update on the company's in-house cancer sequencing programs, which are part of its diagnostic strategy. Illumina has completed sequencing 25 tumor/normal ovarian cancer samples and has discovered about 40 significant genes, half of them not previously known to be involved in ovarian cancer, which it is now validating. It has also completed sequencing 25 tumor/normal gastric cancer samples and is currently analyzing the data.

During the quarter, the company spent $31 million on "strategic investments," according to Christian Henry, Illumina's general manager of life sciences and chief financial officer, which will "help us build our portfolio for the long run."

Flatley noted that these were technology investments that "could play broadly into our platforms." Like the firm's existing technologies, they are "not specifically diagnostic," although they could "ultimately be used in diagnostic applications," he said in response to an analyst's question regarding the nature of the investments.

Overall, Illumina booked $237.3 million in revenue during the third quarter, up 50 percent over the prior-year period.

Of that, $224.7 million came from product sales, an increase from $150.3 million during the year-ago quarter that was led by a "significant uptake of the sequencing business," according to Henry.

Product revenues consisted of $133 million in consumables sales, driven by "strong demand" for both sequencing and microarray consumables, and $88 million in instrument sales, buoyed by sales of the HiSeq 2000.

Revenues from services increased to $12.7 million from $8 million, primarily due to more maintenance contracts for sequencers.

Illumina had $44.8 million in R&D expenses and net income of $35.4 million during the quarter.

As of Oct. 3, it had $210.8 million in cash and cash equivalents, and $596 million in short-term investments.

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