This article was originally published July 22.
By Julia Karow
Illumina reported $162 million in total revenue for the second quarter last week, a 15 percent increase over the prior-year quarter that company officials attributed to "significant" growth in sales of sequencing products.
During a conference call with analysts, officials also provided an update on the Genome Analyzer's performance, noting that the company is seeing runs in excess of 55 gigabases internally. Illumina executives also forecast that the company will see a significant impact on its revenues from stimulus funding later in the year for both sequencing and microarray projects.
The company almost doubled its net income, to $24.7 million, compared to the year-ago period. Net income included non-cash charges of $14.9 million in stock compensation expense and $4.8 million in non-cash interest expense.
As reported earlier this month, overall revenues for the quarter were lower than the company had originally expected, mostly due to a slowdown in its microarray business as customers are waiting for new genotyping products resulting from the 1000 Genomes Project. Other factors include stimulus-funding-related order delays and reduced endowment funding for a few customers (see In Sequence 7/7/2009).
Product revenue totaled $153 million, a year-over-year increase of 19 percent that was "led by significant growth in our sequencing products," according to Illumina CFO Christian Henry. That growth was partially offset by a decline in the firm's array business, he said during the conference call.
About $54 million of product revenues came from instrument sales, a 25 percent increase compared to last year's second quarter, driven by the shipment of "record numbers" of Genome Analyzer sequencers.
Approximately $97 million of product revenue came from consumables, an 18 percent year-over-year increase that was "directly attributable to growth in sequencing consumables," again offset by a decline in array consumables, according to Henry.
"The rapidly expanding installed base of Genome Analyzers pushed sequencing consumables revenue to record levels," he said, leading to a 174 percent increase over the second quarter of 2008, and sequential growth of 20 percent over the first quarter of 2009.
Customers ordered more reagents for their sequencers than Illumina had expected, translating, on an annual basis, to more than $200,000 in reagents per year and system.
Services and other revenue -- including genotyping and sequencing services as well as instrument maintenance contracts -- declined by a third, to $8 million. This was related to a decrease in genome-wide association studies and to the fact that genotyping services are now increasingly offered by Illumina-certified service providers. As previously stated, "service revenues are not expected to grow in line with the products business because of this shift," Henry said.
Research and development expenses for the quarter totaled $33 million, a 43 percent increase over the same period last year. R&D costs included a $5 million non-cash stock compensation expense as well as $900,000 in accrued contingent compensation related to the acquisition of sequencing technology startup Avantome last year. The uptick in R&D spending was related to a staff expansion and "increased project activity," according to Henry.
He did not discuss specific projects, but Illumina President and CEO Jay Flatley mentioned later during the call that the company expects to begin analyzing the first sets of sequenced samples from an internal ovarian and gastric cancer sequencing program, which is part of its diagnostic strategy, during the third quarter. Earlier this year, Flatley said that project involves sequencing approximately 50 cancer genomes and their controls, and conducting whole-transcriptome and methylation-profiling analyses of these samples (see In Sequence 1/21/2009).
Illumina ended the quarter with $352 million in cash and cash equivalents, and $382 million in short-term investments.
For the third quarter, Illumina expects between $162 million and $172 million in revenue -- a wide margin that is related to uncertainty in the timing of stimulus funding awards, Flatley explained. For all of 2009, the company now anticipates between $690 million and $720 million in revenue.
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55 Gb and Growing
Commenting on Illumina's sequencing business, Flatley said that the company continues to see "broad adoption" of the Genome Analyzer, shipping more than 80 percent of its systems to customers outside of large genome centers during the quarter.
The company is also still upgrading its installed based of Genome Analyzers to model GAIIx, which it launched during the first quarter, and has so far taken orders for "well over" 200 upgrade kits, he said.
The GAIIx upgrade, together with a new version of its sequencing pipeline software that Illumina launched in the second quarter to allow the instrument to read more clusters on a flow cell, increases the GA's throughput by 65 percent, Flatley said.
Internally, the company is now achieving runs that exceed 55 gigabases, he said, and it expects to get to 95 gigabases per run by the end of the year using the same workflow. Recent improvements required only changes in software and reagents, "which makes implementation in the field very straightforward," he said.
The company also recently launched a Windows-based interface for its pipeline software, he mentioned, which "simplifies management of the data processing for smaller, non-Linux-based labs."
Because Illumina was able to reduce the production costs for the Genome Analyzer and its reagents, its gross margins increased during the quarter, according to Henry. "These improvements have resulted in a sequencing product line whose profitability is now approximately equal" to genotyping products, he said.
Part of the cost savings came from the reformulated sequencing reagent kits that the company started shipping last year.
Another reason was a new software package that Illumina launched in the second quarter, called RTA, for processing sequencing data during a run in real time. RTA reduces the computing requirements for the system, and has enabled Illumina to remove the IPAR computing module that used to ship with the Genome Analyzer, "a significant component of cost," Flatley said. Illumina introduced IPAR in early 2008 with the GAII upgrade (see In Sequence 4/29/2008).
Further, Illumina has been able to reduce the cost of raw material for the Genome Analyzer. The increase in its sequencing business has also improved the allocation of overhead costs, according to Henry.
Awaiting the Stimulus
Flatley also commented on the company's expectations for so-called stimulus funding from the American Recovery and Reinvestment Act of 2009.
Next-generation sequencing, he said, "is going to be more than likely the biggest beneficiary of stimulus funding." The company believes both genome centers and smaller labs will receive stimulus funding for sequencing projects, but he said he also expects "substantial" microarray projects to be funded.
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"The one difference that you see [between sequencing and microarray stimulus projects] is that in sequencing, there are many sort of 'moon shot' projects, very bold things that customers may try to do," he said.
Some of these projects -- submitted under the NIH "Challenge Grants" initiative -- "are contemplating sequencing, potentially, thousands of samples of particular types," and are asking for up to $40 million in funding, he said, whereas most of the microarray-related stimulus applications are "more of the same" and smaller in size.
"These [large grants] are for scientific endeavors that have never been possible before," Flatley said. "We think there is a reasonable chance that some of those will get awarded."
He acknowledged that it is difficult for the company to estimate the total amount and, in particular, the timing of stimulus awards that will benefit Illumina. "Depending on the grant approval process, it's possible that we will begin to see some stimulus benefit during the third quarter, although we are more likely to recognize material impact during Q4," he said.
Part of the problem is that NIH is expected to make stimulus-related awards shortly before the government fiscal year ends on Sept. 30. "Our impact in Q3 will depend very significantly on the exact timing of how that money gets allocated, and when the orders actually start appearing," Flatley explained.
Besides stimulus funding, he added, Illumina is optimistic about NIH funding for genomics in general, both because of "the disposition" of the Obama administration and because of the recent nomination of former NHGRI director Francis Collins as head of the NIH.