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Nearing 100 Orders, ABI Says SOLiD System Claims 40 Percent of Second-Gen Purchases

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Applied Biosystems last week reported 10-percent growth of its DNA sequencing business for the fourth quarter of its fiscal year 2008, which ended June 30.
 
Since its May launch of the SOLiD 2.0, the platform’s first upgrade, demand for the sequencer has picked up and ABI officials said they believe it now represents about 40 percent of all new orders for second-generation sequencing systems.
 
The company is working on improving the SOLiD’s throughput, developing new software for several applications, and shortening the time to reach customer acceptance, according to ABI President and Chief Operating Officer Mark Stevenson.
 
In a conference call to discuss the fourth-quarter earnings, Stevenson said that the company has taken almost 100 orders for the SOLiD system since it debuted in October.
 
About three-quarters of those orders came from customers outside of major genome centers, including core sequencing facilities at universities, institutes such as cancer research centers, and commercial service laboratories.
 
After holding back SOLiD shipments earlier this year to train enough personnel to service the system (see In Sequence 1/29/2009), ABI now has “the ability to assemble and ship systems on an unconstrained basis to meet demand,” Stevenson said.
 
Part of the reason for holding back was that the company wanted to wait for the SOLiD 2.0, which it launched at the beginning of May, before it shipped SOLiD systems to new customers, he said. It has since upgraded all existing SOLiD installations to version 2.0, which requires no hardware changes to the instrument.
 
New orders picked up particularly after ABI introduced SOLiD 2.0, leading to a backlog for the company. Typically, the time between order and shipment of an instrument like the SOLiD system is six to eight weeks, though “sometimes we try to ship a bit faster, or sometimes the customer lab is not ready.” Orders also tend to come in at the end of a quarter, Stevenson said, “so we sometimes build up backlogs.”
Responding to an analyst’s question regarding rumors about heavily discounted SOLiD sales, Stevenson confirmed that ABI has “placed a number of systems on consignment with certain customers as part of collaborations that we directed at publications and message development.”
 
These placements constitute a “normal practice” he said. “When we take an industry and produce any kind of disruptive technology, it’s part of getting acceptance.” The close-to-100 orders he quoted earlier, though, are “real orders,” he said, and “not just part of those placements that we were doing.”
 
Eventually, he said, customers have to pay up or ABI will take the instrument back.
 
That is what might have happened at GATC Biotech, a German sequencing service provider. A year ago, the company said it had installed a SOLiD system and was offering services on the platform (see In Sequence 7/31/2007). Last week, In Sequence learned that GATC no longer has the system available at its site.
 
“Due to the changes in GATC’s plans, the instrument no longer fits within our production workflow, and as a result, [Applied Biosystems] has agreed to the return of the instrument,” CEO Peter Pohl told In Sequence. “GATC will consider SOLiD for our future needs.” He declined to provide further details.
 
Market Gains
 
According to its own market analysis, ABI is now capturing about 40 percent of all new orders for second-generation sequencing systems, and about 50 percent “in some geographies,” according to Stevenson.
 
That number resulted from an internal analysis of sales opportunities for second-gen sequencing and how many of those ABI eventually turned into orders during the last quarter, compared with its rivals, he explained. Stevenson did not specify whether the analysis only considered Illumina’s Genome Analyzer as a competing system or also 454’s Genome Sequencer FLX.
 
ABI hopes to increase its market share in next-gen sequencing over the next year, Stevenson said, citing a “positive momentum from the 2.0 launch,” customer references, more publications, new workflows for small RNA and gene-expression analysis, improvements in sample preparation and other areas, and the company’s sales and marketing team as driving factors.
 

ABI now has “the ability to assemble and ship systems on an unconstrained basis to meet demand.”

The SOLiD system’s throughput has already increased since the last quarter. While the current specification for SOLiD 2.0 customers is 6 gigabases of “mappable” data per run, several customers have already reported obtaining almost 15 gigabases per run, and ABI has internally generated more than 20 gigabases per run, “underscoring the scalability of our platform,” Stevenson said.
 
Besides increased output, the company is working on other improvements to the system. During fiscal year 2009, which began in July, ABI plans to introduce “automation tools and other innovations to further improve SOLiD workflows and ease of use,” according to Stevenson.
 
Cancer research as well as gene expression analysis are applications for the SOLiD that are likely to grow, he said. The system’s ability to generate paired-end reads, or mate pairs, helps researchers analyze SNPs, indels, long repeat sequences, and other chromosomal abnormalities that are characteristic of cancer, he said. ABI is “collaborating closely” with the Wellcome Trust Sanger Institute and other cancer research institutions “to gain a more complete understanding of cancer and the cancer genome,” he said.
 
With regard to gene expression analysis, “unlike microarray-based approaches … the SOLiD platform enables researchers to look very broadly at the totality of RNA transcripts,” he said, citing a recent publication on transcriptome sequencing by Sean Grimmond and colleagues in Australia (see In Sequence 7/15/2008). The company expects to see “many more publications” for this application, he said.
 
ABI also plans to develop and make available new software tools that can analyze structural variations and gene expression based on SOLiD data, he said.
 
Stevenson also commented on the revenues ABI is planning to obtain from the SOLiD system. The company expects each instrument to generate consumables revenues of about $175,000 per year. In terms of recognizing instrument revenues, he said that it initially took about 90 days to validate a system at a customer’s site, after which the customer has to pay. This time has already come down to 60 days. With a streamlined acceptance-testing protocol, “we are expecting to get revenue recognition down to about 30 days following shipment, which should increase the consumable pull-through,” he said.
 
ABI and Invitrogen
 
Regarding Invitrogen’s pending acquisition of ABI (see related article, this issue), Stevenson said that “planning activities looking ahead to the integration … are progressing well, with multiple teams working towards a smooth start on Day One of the new company.”
 
He conceded that “any large merger has the potential for disruption,” and added that the companies have hired consulting firm Deloitte “to help bring best practice to this and then set up a very formalized integration process.”
 
Though the companies have been looking for areas of synergy and overlap, the SOLiD business has not been among them, he said, and has been unaffected by the merger talks.
 
Also, the two companies have not yet started to collaborate in R&D, and “our internal projects are just continuing as normal,” Stevenson said.
 
ABI said that Invitrogen plans to file a registration statement on form S-4 with the Securities and Exchange Commission in late July or early August, which will contain a proxy statement from both companies.
 
FYQ4 Results
 
ABI’s overall revenues for the fourth fiscal quarter were $609 million, a 9-percent increase over last year’s revenues of $557.3 million.
 
DNA sequencing contributed $157.7 million to revenues, 9 percent more than during the same quarter last year, when it totaled $138.6 million. Its share of ABI’s overall revenues remained flat at 25 percent, year over year.
 
Sales of capillary electrophoresis sequencing systems and consumables during the quarter were “consistent with our expectations,” Stevenson said.
 
While sequencing consumables revenues increased year over year, revenues from high-throughput CE systems declined “due to the shift in the high-end market to next-generation sequencing.”
 
The company also played in the used-equipment market for its high-end 3730xl instruments, offering “some of the customers refurbished and reconditioned instruments,” Stevenson said.
 
ABI sold more low-to-medium-throughput CE instruments than in the year-ago quarter. “We believe this was due to the fact that CE technology continues to be the ‘gold standard’ in commercial applications such as molecular testing and forensics,” Stevenson said.
 
R&D costs for the quarter totaled $52.5 million, down from $53.5 million during the prior-year quarter, primarily due to lower employee-related costs and the termination of a contract with the US Department of Defense last summer.
 
SG&A costs increased to $176.4 million from $160.2 million during the year-ago quarter.
 
ABI recorded a net income of $82.9 million, up from $75.5 million in last year’s third fiscal quarter.
 
At the end of the quarter, ABI had $543.2 million in cash and short-term investments.
 
Despite the pending Invitrogen acquisition, Stevenson gave an outlook for fiscal year 2009 earnings. The company expects “modest growth” in DNA sequencing revenues, consisting of a single-digit decline in CE sequencing that will be offset by “significant growth” from the SOLiD system. That growth is expected to consist of an expansion of the overall market for next-generation sequencing as well as from an increased market share.
 
Stevenson said ABI plans to present an updated analysis of the next-generation sequencing market in August.

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