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Illumina Posts Strong Sequencing Consumables Sales in Q2; Prepares MiSeq, HiSeq Upgrades

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This article was originally published July 26.

Illumina is getting ready to ship upgrades for its MiSeq and HiSeq sequencers and saw strong growth in sequencing consumables sales in the second quarter.

The company's sequencing revenue grew sequentially by a mid-single-digit percentage in the second quarter, primarily due to growth in consumables sales and increased revenue from instrument maintenance contracts.

Sequencing instrumentation revenue for the second quarter decreased sequentially, mostly because fewer MiSeq instruments were shipped. This is because the company cleared a backlog of MiSeq orders from 2011 in the first quarter, so now it only needs to fill new orders, said CEO Jay Flatley, Illumina's president and CEO, during a conference call last week to discuss the firm's second-quarter earnings. He did not provide a year-over-year comparison for sequencing instrument sales.

Sequencing consumables revenue grew 35 percent year-over-year, with "record" shipments of both HiSeq and MiSeq consumables.

HiSeq

HiSeq 2000 orders and shipments increased sequentially during the second quarter, and the average sales price of the HiSeq 2000 has gone up.

Illumina has also seen "surprisingly good performance" for HiSeq 1000 and 1500 sales, Flatley noted.

Most HiSeq orders came from customers who already own a HiSeq and need more capacity, he said.

The new HiSeq 2500 is expected to start shipping early in the fourth quarter, and upgrade kits for existing HiSeq 2000s will be available around the end of Q4.

About three-quarters of orders for new HiSeq 2000s include an upgrade package to the HiSeq 2500.

With the start of HiSeq 2500 shipments, the upgrade price for an existing HiSeq 2000 will increase from $50,000 to $125,000, and all HiSeqs will be able to stream data to Illumina's BaseSpace cloud computing platform.

Illumina currently expects about 25 percent to 30 percent of existing HiSeq 2000 users to upgrade to the HiSeq 2500. Some rush orders may come in before the upgrade price increases, Flatley said.

The company does not know yet how customers will use the HiSeq 2500, which can be run in a normal mode or a more expensive fast mode. Customers owning both a 2000 and a 2500 "may run all the fast stuff through the 2500 and then leave it idle and run the big stuff, the longer runs, on the 2000 to make sure [the 2500 is] free if they get a hot sample that they have to run," Flatley speculated.

The average annualized consumables use of the HiSeq increased to $338,000 during Q2, from $299,000 in the first quarter. The spike is due to increased utilization, more customers using Illumina's own sample prep reagent kits now, and a reagent price hike that went into effect in April. Because more customers will purchase reagents at these higher prices now, the consumables use number is expected to grow further in the third quarter.

MiSeq

Illumina had "record orders" for MiSeq instruments and consumables during the second quarter, and consumables shipments grew almost 60 percent sequentially.

MiSeq sales were down compared to the first quarter, though, which included backlog orders from 2011 that have now been filled.

More than half of MiSeq orders continue to come from non-academic customers, and the "vast majority" of orders are for single units. Flatley said that the company soon expects to see repeat orders from customers who reach the capacity of their first MiSeq.

He acknowledged that the company had a problem with a valve in the MiSeq that clogged because it contained small particles. The issue could be traced back to the vendor of the valve, who now washes the valves extensively before shipping them to Illumina. For the last month or so, all new MiSeq shipments have contained the cleaned valves, and a wash protocol is available for existing users with old valves. Users upgrading to the new MiSeq version will also have the old valve exchanged, he said.

The average sales price for MiSeq decreased slightly during the quarter, mostly as a result of Illumina's trade-in program, where it offers users a discount to customers trading in a desktop sequencer from a competitor or, in some cases, an old Illumina Genome Analyzer.

MiSeq orders in conjunction with the trade-in program have doubled compared to the first quarter and were in the range of 20, Flatley said. The trade-in program is open-ended, he noted, and "the pipeline, as we look forward for potential additional trade-ins, is pretty rich."

The average annualized consumables use of the MiSeq was approximately $55,000 in the second quarter.

Illumina plans to start shipping an upgraded version of the MiSeq, which increases the system's read length and throughput, within the next couple of weeks and will no longer ship first-generation MiSeqs at that point. It will also begin to upgrade existing instruments in the field at that time.

Flatley said that test upgrades have "gone extremely well," enabling one early-access customer to produce 10 gigabases of data in one run "with the data quality our customers have come to expect."

The new MiSeq version will be able to generate 2x250-base reads in about 40 hours of run time. With those read lengths, Illumina plans to target Roche's 454 GS Junior in particular, which offers 400- to 500-base reads. "We expect to aggressively market against longer-read desktop machines and convert those users to MiSeq," Flatley said.

Replacing capillary electrophoresis-based sequencing with MiSeq, however, has not been that easy, he acknowledged. "There are customers that are slow to change," he said. "They have got a process that has been working for them for a while, and we need to just show them why this is so much more economical and so much easier to use than CE. So we're doing okay there but probably a little less than we might have anticipated."

Illumina still plans to submit the MiSeq platform, along with a proprietary assay, to the US Food and Drug Administration for 510(k) approval before the end of the year.

"We continue to be very pleased with the market penetration of MiSeq," Flatley said. Long term, he projected a market opportunity of at least 10,000 systems for the instrument.

Sequencing and Analysis Services

Illumina's sequencing services business booked orders for about 3,500 human genomes in the second quarter and the company expects this "success in genome bookings" to continue in the third quarter.

Many of these genomes are cancer genomes, Flatley noted, and come from customers who do not have a large number of sequencers in house.

The average sales price for human whole genomes is "probably down a little bit" from previous quarters, but is "beginning to flatten out some," he said, without elaborating on actual prices.

Last month, the company launched the RapidTrack Full Genome Sequencing Service, which has a turnaround time of less than two weeks (see CSN 7/25/2012).

The service currently has a limited capacity because Illumina wants to test market demand for it first, so it only accepts about 5 to 10 samples per week right now, Flatley said.

"Currently, we expect this service to be interesting to those research groups that need samples analyzed quickly to meet project deadlines or to submit grants and proof-of-principle studies. We have received several orders testing our [research-use only] process with an eye towards qualifying this service under CLIA before the end of the year," he said.

This week, Illumina revealed pricing for data storage and analysis in its BaseSpace cloud computing environment. Fourteen early-access vendors are also currently developing data analysis software for Illumina's BaseSpace Apps applications store.

The BaseSpace offering "enables us to provide effective solutions for those lacking informatics infrastructure or expertise and allows us to open a new market opportunity," Flatley said.

He mentioned that the "vast majority" of MiSeq systems are already connected to BaseSpace, and about half of them have been uploading data, "demonstrating that our architecture is resonating in the market."

Q2 Financials

Illumina's total second-quarter revenues were $280.6 million, down 2 percent from $287.5 million during the second quarter of 2011, which included a greater number of HiSeq sales.

Instrument revenue for the second quarter was $72 million, down 32 percent from the year-ago period, when the company sold more sequencing and microarray instrumentation.

Consumables revenue was $184 million, up 16 percent from Q2 of 2011. The growing installed based of HiSeq and MiSeq instruments led to a 6 percent sequential increase in consumables sales, which now make up 65 percent of total revenues. "Record shipments" of sequencing sample prep reagents, including TruSeq and Nextera kits, contributed to this growth, chief financial officer Marc Stapley said during the call.

Services and other revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, rose to $21.8 million from $17.6 million a year ago.

Research and development expenses during the quarter were $71.2 million compared to $50.8 million a year ago and included a $21.4 million one-time charge related to the impairment of an early-stage technology Illumina acquired in 2010. That technology is not sequencing-related, Stapley said during the call.

Selling, general, and administrative expenses were $68.5 million, compared to $69.2 million a year ago.

The company's net income for the quarter was $23 million, down from $31 million during the second quarter of 2011.

Illumina ended the quarter with $316.4 million in cash and cash equivalents and $985.3 million in short-term investments.

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