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Illumina Picked Solexa After Mulling Internal Development, Other Next-Gen Shops

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NEW YORK (GenomeWeb News) — Soon after Illumina last week disclosed its plans to acquire Solexa for $600 million in stock, Illumina’s CEO spent the rest of the week explaining to investors and employees how the deal emerged, and how the two companies plan to integrate their technologies and businesses.
 
After the merger, expected to close by the end of next March, Solexa will become a sequencing business unit of Illumina. Solexa currently employs 175people and Illumina had 375staffers as of January.
 
Illumina CEO Jay Flatley told investors during a conference call last week that his company had been interested in sequencing technologies for some time. “We’ve been looking quite broadly at this space for at least 18 months and we’ve analyzed the respective technologies that have been out on the marketplace,” he said.
 
The company also looked into developing a sequencing technology internally “at the pace we would think would be required to hit the market window,” but concluded that purchasing Solexa was the best option, Flatley said.
 
Flatley himself is no newcomer to DNA sequencing: He was a founder and long-time CEO of Molecular Dynamics, the company that developed MegaBace, the first 96-capillary sequencer, and launched it in 1997. Amersham acquired Molecular Dynamics in 1998 for $256 million.
 
Illumina first got in touch with Solexa “back a few years” ago when the companies’ respective chief scientific officers talked about their firms’ technologies “and how we may help each other out,” Flatley told GenomeWeb News last week. But serious talks only started in June, he said, “when we opened a collaboration discussion.”

“We’ve been looking quite broadly at this space for at least 18 months and we’ve analyzed the respective technologies that have been out on the marketplace.”

 
“The more we discussed, the more synergies we kept finding, and we finally concluded that the best way to optimize this was by combining the companies,” said Solexa CEO John West in last week’s conference call. He added that Solexa “has not been for sale” and had not been looking at other potential buyers.
 
One immediate upshot for Solexa is the $50 million investment Illumina made in it last week, in exchange for new Solexa stock. The financing will help Solexa to prepare the broad launch of its 1G Genome Analyzer even before the merger closes.
 
According to West, the investment will “ensure that during the time before signing and close … Solexa has the ability to focus very clearly on delivering this technology to the market, and doesn’t have to worry about financing the company during that interim period.”
 
As of Sept. 30, the Solexa had $47.1 million in cash and cash equivalents, down $21.7 million from six months earlier. Solexa CFO Linda Rubinstein had told investors in August that as of June 30 the company had enough money in the bank to meet its needs for at least 12 months. Illumina, on the other hand, had approximately $170 million in cash as of Sept. 30.
 
Secondly, once the merger closes, Solexa will gain immediate access to Illumina’s sales and technical force. Over the last few months, Solexa has been assembling a field team from scratch and only had technical representatives in four locations near the sites of its first two early access customers, as well as the company’s two locations in Hayward, Calif., and Cambridge, UK.
 
“We are at a pretty modest level,” West said last week. However, immediately after the deal closes, the company will have “approximately 100 people in our combined team that will be capable of sales and support of the 1G Genome Analyzer across the globe,” Flatley said.
 
Complementing Apps
 
Maybe more importantly, the companies’ technologies complement each other well, Flatley claimed. In genotyping, for example, researchers could use Solexa’s platform to discover new SNPs by re-sequencing, and then analyze these SNPs in many samples using Illumina’s genotyping assays.
 
Also, Solexa can measure gene expression in ways different from Illumina’s expression arrays, for example in organisms that have not been sequenced yet, across non-coding regions of the genome, and by measuring “digitally” — that is, counting the transcripts rather than recording an analog signal from a hybridization array.
 
According to West, Solexa’s digital gene expression is “a little bit more expensive than conventional hybridization rates,” making it especially useful as a validation tool for array-based results.
 
West claimed that the combined company “will be the only company that can offer both hybridization-based arrays and digital gene expression.” That might be correct at the time of the merger, but Applied Biosystems, which offers a number gene expression microarrays, stressed that its Agencourt Personal Genomics platform — to be launched next summer — can also measure gene expression in a digital way.
 
Moreover, Solexa’s platform could provide content for Illumina arrays that measure DNA methylation, an important aspect of cancer research to develop new diagnostic tests and drugs. Illumina is currently working with two groups on DNA methylation that are part of the Cancer Genome Atlas, Flatley said.
 
The firms’ technologies can complement each other in a few ways. For one, Solexa re-sequencing could discover novel content for diagnostic panels “that could be run on either the Solexa sequencer or the [Illumina] BeadXpress system,” Flatley said.

Solexa “has not been for sale” and had not been looking at other potential buyers.

 
For another, next-generation sequencers “will be the platform of choice for diagnostics when the goal is to test for the presence of mutations in highly variant diseases or for detection of low frequency mutations in cell populations,” he said. “One of the key uses of this approach will be early detection of mutant cells that are early indicators of disease.”
 
Solexa early-access customers agreed. “Illumina is for genotyping, Solexa is for sequencing, so that's pretty complementary to me right there,” Chad Nusbaum, co-director of the genome sequencing and analysis program at the Broad Institute, told GenomeWeb News by e-mail last week.
 
“There are many ways in which [the platforms] complement each other,” Elaine Mardis, co-director of the Genome Sequencing Center at Washington University School of Medicine, concurred by e-mail.
 
For example, she said, mutations or expression levels found by Solexa’s technology in a few samples could be analyzed in many more samples using an Illumina array. Illumina’s arrays could also be used to validate genotyping or gene expresson data from the 1G instrument, or vice versa.
 
“I think it’s a great move on Illumina’s part,” she said.
 
But the two companies are also hoping to co-develop new products. In a letter to Solexa employees last week, West wrote that “it is not hard to see the potential for substantial synergy between Illumina’s ability to create these sets [of long, pure oligos] (a capability that Solexa does not have) with Solexa’s ability to sequence (which Illumina does not have),” he wrote. “Together, we will have more to say on this topic in the future,” the letter states.
 
In last week’s conference call, West also gave an update on the Solexa’s product launch plans and revenues. As of the end of September, Solexa has not recorded revenue from its new sequencer despite having shipped a total of at least six systems to early-access customers since June.
 
“We are continuing to work with our early-access customers to get them up to the same level of performance that we have internally,” West explained. “We have said all along that that’s a process that will take through the second half of this year.”
 
“Leading genome centers in the US and Canada” comprise the early customers, according to the company. Among them are the Broad Institute, which has at least three systems, Washington University Genome Sequencing Center, and a Canadian genome center that Solexa declined to name.
 
Back in August, Solexa said it would recognize revenue in the third or possibly fourth quarter of this year. West would not tell GenomeWeb last week when Solexa anticipates booking instrument revenues, saying that “that’s really a detailed accounting question.”
 
Previously, Solexa said it was planning to launch its system broadly by the end of this year.
 
Omead Ostadan, Solexa’s company’s vice president marketing, told GenomeWeb News by e-mail last week that Solexa expects to launch the system broadly in early 2007. 

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