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Propelled by Strong Sequencing Business, Illumina's Revenues Grow 16 Percent in Q1

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By Julia Karow

This article, originally published April 28, has been updated to include information from Illumina's first-quarter earnings call and 10Q filing.

Illumina reported a 16-percent revenue increase for the first quarter of 2010 last week, driven primarily by growth in its sequencing business.

According to Illumina President and CEO Jay Flatley, customer demand for next-gen sequencing "continues to outpace" the company's expectations. In particular, the firm experienced higher-than-expected demand for the HiSeq 2000, the high-throughput sequencer it launched earlier this year, though sales of the Genome Analyzer were also strong during the quarter.

Flatley also predicted that the number of installed next-generation sequencing platforms will eventually surpass that of capillary electrophoresis sequencers, estimated at about 15,000, as sequencing costs continue to decline and as applications expand.

In total, Illumina posted $192.1 million in revenues for the first quarter, up from $165.8 million during the year-ago period.

Of the total, $174 million came from product sales, an 11-percent increase over last year's first quarter that was driven by "significant growth" in sequencing products, while microarray sales declined, according to Christian Henry, Illumina's senior vice president, general manager of life sciences, and chief financial officer.

About $114 million of product revenues derived from consumables sales, an increase of 11 percent year-over-year that officials attributed to "strong growth" in sequencing consumables, offset by a decline in microarray consumables. Sequencing consumables sales increased by $20.3 million during the quarter, or 84 percent, due to a growing number of Genome Analyzer installations as well as "customer labs ramping to production scale," according to the company.

Still, microarray consumables presently make up more than half of Illumina's consumables revenues. While a single array reader still accounts for about $400,000 to $500,000 in consumables each year, Henry said, each Genome Analyzer currently drives slightly more than $150,000 to $200,000 in annual consumables sales. Similar data is not yet available for other Illumina sequencing systems.

Instrument revenues totaled $57.2 million, up 13 percent over the first quarter of 2009. This was due to a $5.5 million increase in sales of sequencing systems and a $1.3 million increase in sales of microarray systems. However, sequencer sales declined sequentially from the fourth quarter of 2009. Compared to the prior-year quarter, Illumina sold both more sequencing units and sold them at a higher price, since the GAIIx and HiSeq 2000 systems cost more than the GAII.

In particular, Illumina experienced high demand for the HiSeq 2000 sequencer, which it launched earlier this year. Eighty-five percent of orders for HiSeq during the first quarter came from customers other than large genome centers, "probably the biggest surprise" for the company, Flatley said, which had expected that smaller users would stay with the Genome Analyzer. He speculated that customers were drawn by the HiSeq's high throughput as well as the higher ease of use, compared to the GA.

A number of customers opted to trade in their existing GAs for a HiSeq. Flatley explained that this option is not available to all existing GA customers — depending on when they received their instrument — and only allows them to trade in an old GA for a limited time. Illumina intends to refurbish the GAs it receives and resell them at a later point.

However, the company was only able to ship a "limited number" of HiSeq instruments during the first quarter because of manufacturing constraints. Henry said that by the end of the second quarter, Illumina expects to be able to manufacture "significant volumes" of HiSeq systems, enabling it to meet customer demand "with reasonable ship schedules," according to Flatley.

Nevertheless, Illumina saw "strong demand" for the Genome Analyzer as well, and shipped nearly as many units during the first quarter as it did during the first quarter of 2009. "We expect to see demand continue for the Genome Analyzer in those labs that may not have the budget for the HiSeq," Flatley said.

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Part of the demand for the GA in the first quarter might have come from a program that allows customers to buy a GA first, and then swap it for a HiSeq later in the year when it becomes available for shipment.

But Illumina is, in fact, still improving the GA platform and has almost completed the early-access program for its 95G kits, which enable customers to generate up to 95 gigabases of sequence data on the instrument, according to Flatley. He predicted that most GA customers will eventually move over to the new kits, which are more economical per data point and do not require any hardware changes.

"We are extremely encouraged by the data that our early-access customers are generating," he said. "Not only are they achieving higher throughputs and reads up to 150 bases, but they have achieved significantly higher data quality than with our previous kits and software," and these improvements can be ported over to the HiSeq platform as well.

High raw read accuracy, he said, is important for applications such as de novo sequencing and cancer genome sequencing, and Illumina believes that its chemistry, "whether run on the GA or on the HiSeq, is the premier tool for sequence-based discovery and emerging medical applications," Flatley said.

In response to an analyst's question, he also commented on the potential size of the DNA sequencing market in the future. An estimated 15,000 capillary electrophoresis sequencers are installed worldwide to date, and "we think that the overall market opportunity for [sequencing] systems, if you would span the full performance range of that capillary installed base, is somewhat larger, because sequencing, compared to where it was three to four years ago, is a more powerful set of tools that can do a broader set of applications," he said.

Of the 15,000 installed CE instruments, "some number of thousand" is devoted to high-throughput sequencing, he said, which is the market segment that Illumina has served with its sequencing platform so far. "So what you have begun to see us do is to begin to stratify our product offering to put systems of different levels of performance and price point into the market, and I think you will continue to see us do this over time," he said.

He added that "as the price point continues to come down, brand-new market segments open that were not available to capillary systems," such as in cancer sequencing, which he said over the next three to five years "is going to be a fantastic market opportunity."

Illumina also booked $18 million in revenue from services and instrument maintenance contracts, twice as much as during the year-ago quarter. Most of this growth came from service maintenance contracts for the increasing number of sequencing systems, though the firm also completed a number of large contracts for its service business.

In particular, customers whose one-year warranty on the GA expired opted to extend their maintenance service contracts, a "nice recurrent revenue stream at a reasonable margin for us," Henry said.

Research and development expenses were $43.7 million, up from $32.7 million during the same quarter last year.

Selling, general, and administrative expenses amounted to $50.3 million, up from $42.8 million a year ago.

Net income for the quarter totaled $21.2 million, up from $18.8 million during the first quarter of 2009.

Illumina ended the quarter with $748 million in cash, cash equivalents, and short-term investments. The company did not change its guidance for the remainder of the year.

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