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Illumina Reserved in Comments on PacBio Deal, Forthcoming on Qiagen Deal and New Products

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NEW YORK – Illumina officials were muted in their response to a threat from UK regulators that could potentially kill the firm's planned $1.2 billion acquisition of Pacific Biosciences. But that was just one of the storylines running through and around the firm's conference call following the release of its third quarter financial results.

"While we're still in the process of reviewing the documents, we continue to believe this acquisition is pro-competitive and in the best interests of customers and the genomics industry," Illumina CEO Francis deSouza said.

Along with CFO Sam Samad, deSouza spoke about recent events at the company, including an in vitro diagnostic development partnership deal with Qiagen, which has already put money in Illumina's coffers, and the firm's efforts dealing with population genomics projects in the UK and the US. They also discussed the dynamics of the Chinese market, including the effects of tariffs and a slowdown in research funding.

Though not discussed with investors, Illumina also teased product updates to library preparation and sequencing reagent kits at the recent American Society of Human Genetics (ASHG) conference in Houston.

San Diego-based Illumina came into the second half of 2019 on a down note, after it had to lower revenue guidance in the second quarter and reported only a 1 percent increase in revenues year over year in Q2. Since June, the UK Competition and Markets Authority (CMA) investigation into the PacBio deal has been a major concern as well.

In an analyst note published Thursday, Cowen's Doug Schenkel noted that as recently as a month ago, Illumina management had expected the PacBio deal to close by the end of the fourth quarter. "We believe the deal is now highly unlikely to be completed," he wrote.

Illumina did not immediately respond to request for comment about whether it still expects to acquire PacBio by year's end. Originally, Illumina and PacBio's merger agreement ran to November, but last month, Illumina and PacBio revised their merger agreement to extend through Dec. 31, with an option for Illumina to further extend it through March 2020.

In documents released Thursday, the CMA said that it preferred a "structural remedy" to preserve competition in the next-generation sequencing market and that blocking the deal was, provisionally, the most effective way to do that. However, the CMA said it would consider combinations of measures and invited Illumina, PacBio, and third parties to comment on its findings.

As the CMA considered whether Illumina was simply absorbing its competition in the research market, Illumina struck a deal in the clinical sequencing space to turn a potential competitor, Qiagen, into an ally.

The firm noted that in Q3 it had already recognized revenue from its in vitro diagnostics partnership with Qiagen — approximately $30 million, comprising access fees and other revenue. And this kind of deal emphasized what the firm is looking for in its partnerships.

"What we are looking for is an ecosystem of partners to expand menu on our sequencers and give us access to clinical domains," deSouza said. "They already have the commercial capability to take products to market. That's exciting for us."

He added that similar partnerships, such as Illumina's instrument deal with China's Berry Genomics, also gave Illumina access to geographical distribution. "Those are some of the strategic capabilities we're looking for as we sign these partnerships," deSouza said.

Though geography was not a focus of the conference call, Illumina officials noted that market dynamics in China were affecting its business. Tariffs contributed to a 7 percent decrease in revenue from China. "If you normalize, it's essentially flat," Samad said.  The firm's data suggests that growth on the clinical side is strong, especially in non-invasive prenatal testing and genetic disease testing, deSouza said, but there has been a decline in research funding, "driven by macroeconomics." The firm's internal data suggests research funding in China is down 10 percent year-over year.

Illumina is also expecting population sequencing projects in the UK and the US to contribute to 2020 revenues. The UK Biobank sequencing project is starting to "ramp up" and could drive revenue as soon as next quarter, deSouza said. He also expressed a "high degree of confidence" that an NHS sequencing project would kick off in the first half of next year and noted Illumina is working with the All of Us project on how it might ramp up over the next year.

At last week's ASHG meeting, Illumina scientist Gary Schroth released details on updates to reagent kits coming in 2020. Illumina will update two library prep kits in the first half of next year and will update NovaSeq products as well.

Illumina is working on a PCR-free version of the Nextera DNA Flex kit for enrichment that will offer a 1.5-hour workflow and enable high-quality genomes from low DNA inputs, as low as "60, 40, even 20 nanograms," Schroth said, down from 200 ng. The PCR-free prep is "getting almost identical metrics" on autosome mean coverage and the percent of Q30 bases, among other quality indicators, he said.

And a TruSeq Stranded RNA Exome kit for universal, multi-species depletion is indicative of an effort to improve RNA-seq kits across the portfolio. "We are upgrading all of our RNA-Seq kits with new technology modules including new RiboZero-Plus depletion down to 10 ng, ability to use 384 indexes, ability to use Nextera Flex technology to convert cDNA to library, and then finally the ability to use our 'fast-hyb' components from our Nextera Flex for enrichment kits," Schroth later added.

To support the new library prep kits, Illumina also has plans to release NovaSeq SP 200 cycle reagent kits and S4 flow cells, both of which could arrive "later this year" or "early next year" an Illumina spokesperson said in an email. Illumina is developing the SP-200 cycle kit "in direct response to customer feedback," the spokesperson added.

Illumina said pricing and kit sizes have not been finalized, but the firm plans to offer S4 multipacks at a price that makes the "$1,000 genome" accessible to many customers.

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