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Illumina Ships ‘Record’ GAs In Q3; Says Longer Reads Will Spur De Novo Sequencing

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Illumina said last week that it shipped a “record number” of Genome Analyzers during the third quarter.
 
The company said that more than 70 percent of its sequencers are now installed in labs other than the large genome centers. The company continues to stress that longer reads will enable users to perform de novo sequencing as mRNA sequencing begins to compete with array-based gene-expression analysis, and while array-based genotyping remains insulated from sequencing-based competition.
 
During Illumina’s third-quarter conference call last week, CEO and President Jay Flatley said that the company shipped a “record number” of Genome Analyzers during the three months ended Sept. 30, though he did not say what that number was.
 
“We believe that our installed base of revenue systems is at least equal to that of the other three suppliers in the market in combination,” Flatley said. Illumina’s competitors in the market are Applied Biosystems, Roche’s 454 Life Sciences, and Helicos BioSciences.
 
He said that more than 90 percent of all Genome Analyzers shipped during the third quarter went to customers outside of genome centers. In particular, smaller labs in Europe and Asia started picking up Genome Analyzers in the last quarter. Overall, more than 70 percent of all Genome Analyzers are now installed outside of genome centers.
 
Illumina has not disclosed how many instruments it has shipped to date, but according to a recent analysis by In Sequence, seven of the largest traditional genome centers worldwide collectively account for about 90 placed Genome Analyzers (see In Sequence 10/7/2008).
 
Assuming these genome centers account for approximately 30 percent of all installed Genome Analyzers, Illumina’s total installed base is in the neighborhood of 300 systems. This number could be higher or lower, depending on how many institutes Illumina qualifies as “genome centers.” Illumina did not respond to requests regarding its definition of a genome center.
 
In terms of instrument output per run, Flatley said that customers are now “routinely” generating seven gigabases of data per run, while “some” are obtaining 15 gigabases or more in a run.
 
Internally, he said, company researchers have been able to obtain “well beyond” 15 gigabases of data from a single run by now “and have demonstrated substantial headroom in the overall architecture” of the system.
 
“We continue to invest very heavily in R&D internally to continue to move the platform forward,” he said.
 
As an example of one improvement, he mentioned a “new formulation” that is currently in beta-testing and will allow users to obtain longer reads. Some early-access customers, he said, have already used the new chemistry to obtain reads exceeding 100 base pairs.
 
At a conference last month, an Illumina official said that the improvement is a new reagent used during the deblocking step of the sequencing cycle (see In Sequence 9/30/2008).
 
Longer reads, combined with the low cost of sequencing on the GA, Flatley claimed, will help Illumina make inroads into the de novo sequencing market, which is currently claimed by Sanger sequencing and 454 Life Sciences.
 
“As this improvement rolls out to customers this quarter, we believe applications such as de novo sequencing that have previously sacrificed cost for read length on other technologies will begin to migrate to the Genome Analyzer,” he said.
 
He added that some customers are already using data generated on the Genome Analyzer for de novo assemblies.
 
As planned, he said, the company started shipping a new sequencing reagent kit during the third quarter that simplifies the workflow for customers.
 
This month, the company also launched GenomeStudio, an update of its software platform to analyze both array and sequencing data (see In Sequence 10/21/2008), as well as mRNA-Seq, a reagent kit for full-length cDNA sequencing.
 
Taking a Bite from the Chip Business
 
mRNA-Seq, in combination with a multiplexing protocol that Illumina plans to commercialize “soon,” will start to nip at array-based expression analysis in the near future, Flatley predicted. The combination “is rapidly becoming price-competitive with traditional array-based expression, while offering a perspective of the transcriptome that has never been seen before,” he said.
 
Even without multiplexing, mRNA-Seq allows customers right now to “get vastly better data than you could ever get off an array for prices in the range of about $800,” Flatley said. As the cost of sequencing drops and multiplexing becomes available, that price will go down, he added.
 
He mentioned, though, that array-based gene expression is “still a very healthy business for us,” particularly in the “lower-end” market “where there is a desire to do lots and lots of samples at low price points for screening-type applications.”
 
Over time, he predicted, “the more complex and richer expression applications will migrate to sequencing.”
 

“We believe applications such as de novo sequencing that have previously sacrificed cost for read length on other technologies will begin to migrate to the Genome Analyzer.”

Array-based genotyping, on the other hand, will not be taken over by sequencing-based genotyping anytime soon because it will always remain cheaper, Flatley said.
 
“We believe that day is a long way away because as rapidly as sequencing is coming down in price, we are driving down the cost of genotyping as well.
 
“You can imagine some day where sequencing costs $500, but running a chip costs $5, and there will be a market for both, even at that point.”
 
Regarding emerging applications, Flatley said that targeted sequencing is an important one, but one that he predicted will be short-lived.
 
None of the genome capture or partitioning methods developed to date “are yet perfect in terms of how well they capture the region of interest and exclude the regions that are not of interest,” he said, adding that “certainly, we will have products that address targeted sequencing in the not-very-distant future.”
 
However, targeted sequencing “will become less important over time as the cost of sequencing drops,” Flatley predicted.
 
Flatley also addressed the overall economy and its potential effect on the company. He said he is optimistic that the current global financial crisis will not adversely affect Illumina’s business, which derives more than 80 percent of its revenue from the non-commercial sector.
 
“In terms of overall funding, we have continued to see positive allocations toward next-generation sequencing and genetic analysis research from economies around the world,” Flatley said.
 
And even if NIH funding declines slightly, that will not affect Illumina’s bottom line significantly, he added. “We do not believe that a flat-to-modest decline in NIH spending would materially impact our business, given that funding allocations will continue to favor innovative technologies and the novel methods such as ours,” he said.
 
Regarding pharmaceutical customers, Flatley said that he does not expect them to use sequencing as part of clinical trials anytime soon, an area that developers of other sequencing technologies, such as Complete Genomics and Pacific Biosciences, have said they want to target.
 
“We don’t see clinical trials as being a market opportunity in the near-term,” Flatley said. “Pharma companies are not even really doing genotyping at a large scale in clinical trials, and they are certainly not going to be doing sequencing anytime soon, in our view.”
 
The Bottom Line in Q3
 
During the third quarter, Illumina generated $150.3 million in revenue, a 54-percent increase over the $97.5 million it reported during the same period last year.
 
Product revenue for the quarter totaled $140.3 million, up 56 percent from $90 million during last year’s third quarter.
 
Of that, $90 million came from consumables, a 71-percent year-over-year growth that was driven by strong demand for Infinium HD microarray products.
 
The company did not break down what percentage of consumables revenue came from sequencing, but chief financial officer Christian Henry said during the call that sequencing consumables “delivered another strong quarter” and grew about a third over the second quarter of 2008, driven by a greater number of installed Genome Analyzers producing data at full scale.
 
$47 million of product revenues came from instrument sales, up more than a third over last year’s $34 million for the quarter. Again, Illumina did not break out how much its platforms each contributed to this growth but said that revenue from sequencer sales was up two-thirds year over year “as we recognized revenue on a record number of Genome Analyzers,” according to Henry. He added that the company sees “strong demand for this system as we head into the fourth quarter.”
 
Illumina booked $10 million in revenue under the “services and other revenue” category, which includes genotyping and sequencing services as well as instrument maintenance contracts. Those revenues were up 43 percent over last year’s $7 million during the same quarter.
 
R&D expenses for the quarter increased 40 percent to $28 million for the quarter, from $20 million during the same period last year. These expenses included $4 million in non-cash compensation and $600,000 of accrued contingent compensation based on employment milestones that were related to Avantome.
 
The growth in R&D expenses was primarily due to an increased headcount, and part of it was related to Avantome’s R&D expenses.
 
SG&A expenses were $39 million during the quarter, up 62 percent over last year’s $24 million.
 
Illumina recorded a net loss of $7.3 million for the quarter, compared to net income of $14.5 million during the prior-year period. That loss resulted from Illumina’s acquisition of Avantome, which closed Aug. 1: Illumina recorded a one-time charge of $24.7 million related to the acquired in-process research and development expenses of Avantome during the third quarter.
 
For the fourth quarter, Illumina expects between $152 million and $156 million in revenue, a year-over-year increase of 35 to 39 percent.
 
The company’s cash position increased during the third quarter due to its secondary offering in August, which fetched $343 million in net proceeds. As of Sept. 28, Illumina had $355.2 million in cash and cash equivalents, and $294.4 million in short-term investments.
 
Henry hinted at possible future acquisitions, though he did not specify any technology area. “One of the reasons why we raised the money is to be opportunistic and look for opportunities across the market,” he said, in areas that would complement Illumina’s current business and provide “synergy” for its strategy for the future.
 
Since emerging companies likely find it increasingly difficult in today’s economy to obtain financing, he said, “I suspect there is probably more opportunity for us to look at assets that have better valuations,” adding that “we’ll fill you in as those things come to fruition.”
 
Flatley added that Illumina will likely look at smaller companies that could either provide new content for its products or contribute new technology platforms that are “very early in their development cycle.”
 
He mentioned Avantome, which Illumina purchased in August, as an example, adding that “the kinds of things we might look at might even be earlier than Avantome.”
 
Commenting specifically on sequencing, he said that “we have very aggressive internal development programs to make sure our sequencing technology is moving rapidly, and we have the ability to acquire, if we need to, at some time in the future. There will be some exciting technologies on the horizon at some point in time. And certainly, we plan to be a player when any of those technologies make it to market.”
 
Flatley cautioned, however, that the company will be “very selective” about acquisitions and will not “go on an acquisition binge.”
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