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Illumina Says 'Significant Growth' in Sequencing Demand Drove 12-Percent Rise in Q4 Revenue

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By Julia Karow

This article, originally published Feb. 5, has been updated with additional information from Illumina's conference call.

Illumina last week reported that fourth-quarter revenue increased 12 percent — slightly higher than it projected a few weeks ago — largely resulting from continued growth in sales of its sequencing products.

The company said it is in discussions with several large genome centers regarding the replacement of their Genome Analyzer sequencers with the HiSeq 2000 high-end sequencer the firm launched last month (see In Sequence 1/12/2010).

But Illumina officials stressed during the firm's fourth-quarter conference call that it is too early to forecast how many of its customers will trade existing GAs for HiSeq machines.

Total receipts for the three months ended Jan. 3 increased to $180.6 million. The number was higher than the $176 million the company had forecast a few weeks ago because it decided subsequently to include in the results a multi-instrument GA shipment.

About $168 million of total revenues came from product revenue, a 10-percent growth over the prior year period that was led by "significant growth" in sequencing products. Meantime, the firm's microrarray business declined year over year, according to senior vice president of corporate development and CFO Christian Henry.

Of the product revenue, $105 million resulted from consumables sales, a 6-percent growth compared to the fourth quarter of 2008, and was driven by "very strong growth" in sequencing consumables. However, total revenue was offset by a decline in microarray consumables, which represents more than half of total consumables revenues, according to Henry.

He said that despite the manufacturing problem the company had with certain sequencing reagent kits late last year, each installed Genome Analyzer still accounted for annual consumables sales of between $150,000 and $200,000 last year, as previously expected. The reagent issue cost Illumina approximately $4 million to $5 million in revenues in the fourth quarter, he said, significantly less than the up to $15 million in lost revenues the company had feared.

Revenue from instrument sales in the fourth quarter grew 19 percent year over year, to $61 million. The increase was fuelled by "strong growth" in sequencing instrument sales and "record" Genome Analyzer shipments that were partially offset by "lower sales" of array instruments during the quarter.

Services and other revenues, which include genotyping and sequencing services as well as instrument maintenance contracts, increased 60 percent year over year, to $13 million. This growth was mainly driven by an increase in service maintenance contracts "associated with the growing installed base of sequencing systems," Henry said.

At the end of the fourth quarter, Illumina had an order backlog of $228 million, "the largest backlog in the history of the company," according to Henry. Some of this was related to a recent order of 128 HiSeq 2000 sequencers by BGI, China's largest genome center, but "even excluding that, our backlog had record levels," he said.

Typically, backlog orders ship within four quarters, depending on customers' requests and whether the order is for catalog or custom products, he said.

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Describing the three-year BGI deal, for which Illumina will recognize revenues over the next three years, Henry said it is an "operating lease"-type deal that is expected to generate the majority of revenue in 2011 and 2012.

At the end of the agreement, BGI will assume title to the instruments. He said Illumina is not "actively pursuing" operating leases for other large-scale sequencing instrument sales but will evaluate each potential deal "on its own merit."

"At the end of the day, [new deals have] to be accretive to us … and the BGI deal is going to be accretive to our operating margins," he said. "It was one of those deals that made a lot of sense for us to do."

Illumina officials also commented on how its HiSeq 2000 system has been received so far. According to CEO Jay Flatley, early feedback from customers has been "very positive" and interest has been "quite broad across the entire range of the customer base."

The company is currently running "initial customer samples" on the new system, results from which it expects to present at the Advances in Genome Biology and Technology conference later this month.

According to Flatley, Illumina plans to take most HiSeq orders this quarter from customers that order multiple units because the company will initially have a limited supply of the instruments, and wants to "minimize [the number of] sites we have to support the new technology in."

The firm plans to provide limited discounts on these orders, though. HiSeq has a list price of $690,000, but there will be "little to no" discounting on multiple-system orders, according to Henry.

"It's a brand-new technology, a technology customers want to get access to, so we are not finding a need to discount the technology," he said.

Illumina is also in discussions with several large genome centers about trading in their existing Genome Analyzers for HiSeq 2000 machines, which may take between six to 12 months to happen.

According to Flatley, trade-ins will begin in the third quarter, when Illumina expects to manufacture the instruments at full capacity. However, he said that it is too early to say what percentage of GA customers will trade their instruments in for HiSeq machines.

While large genome centers may opt to do so, "our hope is that a lot of [customers], rather than trading in, will just buy a new HiSeq and put it alongside a GA," he said.

Customers with single GA units, on the other hand, may continue to purchase GAs because of the lower price, he said. The firm will probably know more within the next three to six months, he added.

In addition, following BGI's purchase of 128 HiSeq 2000 units, Illumina expects other large genome centers to begin expanding their capacity in the future.

"We anticipate that many of the large centers around the world are going to go back and look for ways to try to up their investment … to attempt to maintain competitiveness in terms of the total output that they are capable of generating," he said, a process that could take several quarters.

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Flatley also confirmed that some customers that were close to placing an order for a GA have postponed their purchase in order to re-evaluate their options in light of the HiSeq. But he said that the company expected those delays and believes it will not be more than a month or two before customers make up their minds.

Illumina is also in discussions with some customers who have already placed orders for GAs but have not received their instruments regarding trade-ins for HiSeq systems. "In some cases, that's something we will decide to do, and in some cases, not," he said.

One limiting factor for the HiSeq 2000 will be Illumina's manufacturing capacity for the instrument. Flatley said the company began producing it during the fourth quarter of 2009 and currently has several units at its Hayward, Calif., facility that are in the final testing phase. He said Illumina expects to ship these instruments to customers over the next one or two months.

He also said Illumina expects to be reaching full manufacturing capacity for the system during the second quarter. "Absent some unbelievably unanticipated demand, in the third quarter we will probably be able to supply most of the orders that come in in a timely way," he said.

Flatley also commented on the diversification of Illumina's sequencing offerings. Later this year, the firm will provide four sequencers — the iScan SQ module, the GAIIe, the GAIIx, and the HiSeq 2000 — that differ in price and throughput. "Our plan all along in this marketplace has been to have different systems that address different portions of the marketplace," he said.

Specifically, the GAIIe, which has a list price of $250,000 and will eventually reach a throughput of 40 gigabases per run, will allow labs that cannot afford a GAIIx to "do lots of great science very economically," he said.

The iScan SQ module, on the other hand, addresses customers who already perform array-based genotyping or gene expression studies on Illumina's iScan platform. "We are really looking to that product as one that will target customers that are principally array users today but want, over time, to migrate toward sequencing," Flatley said.

Illumina said it expects 2010 revenues to grow approximately 20 percent year over year, to about $800 million. The majority of these receipts will be recorded in the second half of the year, partly because of the time it will take the company to scale up manufacturing of the HiSeq 2000.

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