By Julia Karow
This article was originally published July 28.
Illumina has taken orders for more than 135 MiSeq instruments and has begun shipping the benchtop platform to early-access customers, the company said last week in a call to discuss its second-quarter financial results.
Second-quarter sequencing revenues grew more than 50 percent, largely driven by HiSeq 2000 sales, as the company reduced its backlog of orders for the system.
Overall, Illumina's revenues grew 36 percent for the quarter, due to strong sales of both sequencing and microarray products.
During the call, Illumina CEO and president Jay Flatley and CFO Christian Henry provided additional details on the firm's sequencing business.
Since Illumina started taking orders for MiSeq in April, it has booked orders for more than 135 systems, more than half from customers who currently do not have an Illumina sequencer, Flatley said. Most of the orders are for a single instrument.
The company recently started shipping MiSeqs to early-access customers under a program that will continue until early September, and expects customer feedback in the next few weeks. "Our development program is on track, and we have full confidence that we will meet the design specifications of the system," Flatley said.
The main initial applications for the system, Illumina believes, will be amplicon sequencing, bacterial genome sequencing, and clinical sequencing. For amplicons, MiSeq promises "equivalent turnaround times" to traditional Sanger capillary sequencing at reduced cost.
The TruSeq custom enrichment kit that Illumina recently launched (IS 7/19/2011) will be important to facilitate "widespread use" of the MiSeq because many of its applications will be in targeted sequencing. "[M]aking it easy for customers to develop [target sets], and get those kits manufactured quickly, is very important to get adoption in that segment," Flatley said.
Because Illumina expects MiSeq customers to be "less sophisticated" in bioinformatics than current users of next-gen sequencing, the company is "working very aggressively" on a cloud computing program that will allow MiSeq customers to upload their data, store it, and analyze it in a cloud environment and have "no local computers whatsoever," Flatley said. The cloud service will become available "in very short order," he said.
Illumina is "on track" to ship larger quantities of MiSeq instruments in the fourth quarter, but it expects to have a "significant" order backlog for several quarters as its scales manufacturing.
According to Flatley, the firm plans to manufacture MiSeq instruments "in limited quantities" for the first few quarters to ensure there are no "systematic problems" with the system that would require a retrofit in customers' labs.
He said that the firm has been "ramping" its supply chain for MiSeq parts and has built new manufacturing infrastructure to control the quality of the reagent cartridges for the system. "The fundamental components of the reagents of the SBS chemistry are the same [as for HiSeq] but the format and the methodology of manufacturing is quite different," he said.
Henry said the company plans to add field service employees and sales staff for MiSeq in the second half of the year "because we do expect a pretty big ramp of the product."
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Illumina's sequencing revenue during the second quarter grew by 53 percent year over year, largely due to sales of the HiSeq 2000. The company added 30 to 35 new customers for its sequencing products during the quarter, which is in line with previous quarters.
"HiSeq is driving the global expansion of next-gen sequencing, unlocking new sources of funding from governments, universities, and diagnostic labs," Flatley said.
About 90 percent of HiSeq shipments and orders during the second quarter related to customers other than major genome centers. More commercial customers than before are buying HiSeq systems, a small trend that will likely continue, Flatley said.
Sequencing consumables revenue grew more than 50 percent for the second quarter compared to the same period last year, but existing HiSeq customers bought fewer consumables in the second than in the first quarter. Illumina attributed this sequential drop to the fact that customers were using up their stocks of version 2 sequencing reagent kits while they were waiting for version 3, released in May. Adoption of the new kit, which increases the instrument's output per run to up to 600 gigabases and improves data accuracy, has been strong, Flatley said.
He acknowledged that the increased HiSeq throughput has forced some customers to barcode and multiplex samples where they could run one sample per lane before. He said the MiSeq is designed to take over some of these lower-throughput applications. "The fact that we have pushed that throughput [of HiSeq] so high has created a bit of a vacuum behind HiSeq, which we expect to fill with MiSeq," he said.
Illumina reduced its order backlog of HiSeq instruments during the first quarter, he said, and expects HiSeq shipments in the future to be smaller to "closely reflect the incoming order rate." Orders will consist of Genome Analyzer upgrades, existing customers adding instruments, new customers, and "competitive displacements." Henry added that the company expects "HiSeq demand to remain robust."
HiSeq systems are manufactured at Illumina's Hayward facility in the Bay Area, but the optics module is built in its San Diego facility. To make the process more efficient, the company is now moving both processes to Hayward, Flatley said.
In the past, Illumina has made frequent upgrades to the system — for software, reagents, and hardware — and some customers have found that "the pace of change is too fast," Flatley said. As a result, the company plans to bundle changes in the future, reducing the frequency of upgrades, he said.
Flatley said that Illumina still has a "fairly large installed based" of Genome Analyzers, but that over the next several years, he expects a "material number" of these will be traded in for HiSeqs, albeit at a smaller discount than under the initial trade-in program, which has expired.
The market for refurbished Genome Analyzers will not be large, he predicted, adding that "for most applications, customers will either move up to a HiSeq or down to a MiSeq."
With regard to the HiScan SQ, Flatley said that the company had anticipated microarray users with an interest in next-gen sequencing would be the primary customers for the system. However, to its surprise, "at least as many customers come at it from the sequencing side," using the system for occasional microarray work.
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In terms of sequencing reagents, Flatley said that Illumina has improved its ability to deliver kits "consistently on time" over the last few quarters, so customers could reduce their inventories. "They get fresher reagents, they don't have any risks of holding inventory when we make transitions, and it makes transitions a lot easier," he said. Typical customers keep about three to six weeks' worth of reagents, he said.
The company has seen a "reasonably good uptake" of its TruSeq Exome enrichment kit, which it launched last year (IS 11/9/2011), with "quite a few" customers testing the product. Flatley acknowledged that the target selection market is "competitive" — Illumina is competing against Agilent's SureSelect and Roche NimbleGen's SeqCap EZ products.
Illumina Genome Network
Illumina's human whole-genome research sequencing service, called the Illumina Genome Network, recently added the University of Washington as its third partner (IS 7/5/2011).
The service also recently won a contract from Cancer Research UK to sequence up to 1,500 samples (CSN 7/27/2011) and from Knome to sequence 250 samples.
Illumina now charges $5,000 per genome for projects of at least 10 samples and $4,000 per genome for projects of at least 50 samples.
The turnaround time for the service has recently decreased to "significantly below" 90 days, Flatley said.
"While IGN strategically serves a niche market, we continue to believe the service research market for whole-genome sequencing will represent approximately 10 to 15 percent of the overall sequencing market over the next two years," Flatley said.
According to Henry, Illumina is not aware of any instance where it has lost a systems sale because a customer decided go with a sequencing service provider instead. "We do think services are going to be a niche market but one we need to participate in, and have participated in for years," he said.
Illumina acquired Epicentre Biotechnologies earlier this year (IS 1/18/2011) and appears to be happy with its purchase so far. According to Flatley, Epicentre's revenues and operating margin have "exceeded our expectations," and the company will release new products that make use of Epicentre's Nextera technology. In addition, Illumina plans to replace some third-party enzymes in its kits with Epicentre enzymes, resulting in cost savings.
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Q2 Earnings and Beyond
Overall, Illumina booked $287.5 million in second-quarter revenue, up 36 percent over last year's $212 million, growth that was driven by "strong demand" for its sequencing products as well as "an overall improvement" in its array business, according to Henry.
Revenue from products totaled $270 million, a 36-percent year-over-year increase, while revenue from services and other sources was $18 million, up 38 percent compared to $13 million in Q2 of last year.
The main driver for the growth in services revenue, which includes genotyping and sequencing services — including IGN — as well as instrument service contracts, was the increase in maintenance contracts for sequencing systems.
Consumables revenue increased 26 percent to $159 million from $126 million in the second quarter of 2010, driven by "broad-based demand across both sequencing and microarray products."
A 53 percent jump in instrument revenue to $107 million was "largely due" to sales of HiSeq, HiScan, and HiScan SQ systems. Sequentially, instrument revenue fell 7 percent over the first quarter because the company reduced its backlog of HiSeq orders, which came from trade-ins of Genome Analyzers, prior to the quarter. Second-quarter instrument shipments reflect "more typical levels" of HiSeq orders, Henry said.
Second-quarter research and development expenses were $50.8 million, compared to $43.7 million in the year-ago period.
SG&A expenses were $69.2 million, compared to $53.1 million for last year's second quarter. Henry said the company expects "incremental sales and marketing expenses" in the second half of the year related to the launch of the MiSeq system.
Illumina had $31 million in net income for the second quarter, compared to over $30 million last year.
The company ended the quarter with $261 million in cash and cash equivalents and $973 million in short-term investments.
For all of 2011, it currently expects a revenue increase of between 24 percent and 26 percent, which would bring total revenue to around $1.1 billion. The company forecast earnings growth of between 33 percent and 36 percent.
Flatley said that research funding is "somewhat uncertain" globally. While there has been "some large incremental funding" proposed in Europe, there are uncertainties about the 2012 budget in the US. "Overall, we continue to believe that the funding allocations globally will further genetic analysis tools — in particular, next-generation sequencing," he said.
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