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As Q4 Revenues Rise Sharply, Illumina Says Molecular Dx Will Make Initial Impact In 2008

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
As Illumina gears up to launch its BeadXpress multiplexing platform within the next couple of months, company officials said last week that revenues from molecular diagnostics are not expected to make an impact on revenue until 2008.
 
The BeadXpress and a series of recent collaborations are expected to jumpstart the firm’s efforts in the molecular diagnostics market, but Illumina’s priority for 2007 is integrating Solexa, said President and CEO Jay Flatley during the company’s fourth-quarter conference call.
 
Meanwhile, Illumina reported a 163 percent rise in fourth-quarter revenue, as the company shipped 35 BeadArray instruments and service revenue climbed 91 percent.
 
Illumina, which currently derives its revenue from selling instruments for genotyping and gene-expression applications, expects future revenue to also be driven by molecular diagnostics and the Illumina Genome Analyzer, the next-generation DNA sequencing instrument it recently acquired along with Solexa (see BioCommerce Week 11/21/2006).
 
Illumina’s BeadXpress platform, which is based on bead technology the company gained through its acquisition of CyVera in 2005 for $17.5 million, is targeted for low- to mid-multiplex applications in the research and molecular diagnostics fields. While the firm will launch the BeadXpress this quarter, the payoff will come further down the road, according to Flatley.
 
“Molecular diagnostics in ’07 will not be a contributor to our revenues,” he said during the conference call. “It certainly will begin to be in ’08. So our focus on the diagnostics side this year is very much on the development side to get our first diagnostics products developed, get the assays really robust and then get them submitted into the FDA for hopeful approval in 2008.”
 
Illumina intends to market BeadXpress to CLIA-approved labs and encourage them to build their own tests on the platform. But the firm also plans to sell the instrument to partners that will develop content and market the system on their own.
 
Illumina will deploy its own content on the platform in 2008, which will be a product of an alliance it struck with DeCode Genetics in May 2006. The firms plan to develop diagnostics for gene variants that DeCode has shown to be risk factors for developing diseases such as type II diabetes, myocardial infarction, and breast cancer.
 
“We’ve nearly completed our beta program and we’re in the process of ramping up our manufacturing capacity,” said Flatley. “Initial customer demand has been overwhelmingly positive and we’re building a nice backlog for the system. This platform will be sold directly into the research market and over time targeted to penetrate the molecular diagnostics market,” he said.
 
The collaboration with DeCode is one of several that Illumina has signed over the past nine months aimed at the molecular diagnostics market. In July, the firm said that it would work with ReaMatrix to discover and develop diagnostic panels for certain undisclosed diseases. The firms plan to develop tests using the BeadXpress platform, and ReaMatrix, whose R&D operation is based in Bangalore, India, will have a non-exclusive license to sell the tests in the Indian market.
 
Last month, Illumina signed two more molecular diagnostic alliances. The firm said it will collaborate with the Mayo Clinic to co-develop molecular diagnostics based on the BeadArray and BeadXpress platforms for undisclosed “complex diseases”.
 
It also is collaborating with the Children’s Hospital of Eastern Ontario to develop molecular diagnostics to screen newborns for spinal muscular atrophy and hemoglobinopathies. These tests will run on the BeadXpress platform, and Illumina will hold global commercialization rights to them.
 
Focusing on Solexa Integration
 
While Illumina maintains that molecular diagnostics is an integral part of its growth strategy for the future, this year the firm will focus on integrating the operations of Solexa, which it recently acquired for roughly $615 million, and launching its next-gen sequencer.
 
“We’re heavily focused on making sure that the Solexa acquisition meets its core objectives, and that’s growing the revenue, getting the system into the market, making sure it’s robust, and adding additional applications to that,” said Flatley. “We set goals internally about the kind of market share we want to achieve there, and so we’re certainly going to be very focused on delivering on those goals.”
 
He did not disclose those market-share goals, and company officials declined to provide guidance specifically for the sequencing business going forward.
 
Last month, Solexa said that the early-access phase of commercialization had been completed. “We’re now in full commercialization with a significant backlog and are scaling our manufacturing and commercial capability to meet the market demand,” said Flatley. “We believe that the sequencing business will be a significant portion of our total revenue in 2007.
 
“By the end of the first quarter, we expect to have the entire commercial organizations completely integrated, and in April we expect to implement our ERP system in Hayward, California, and in the UK sites,” he said.
 
Flatley also noted that the firm is committed to making sure that its base genotyping and gene-expression business does not “falter as a result of our focus on Solexa.” He announced several promotions and appointments during the call intended to create greater oversight over individual pieces of the company’s business (see People).
 
Q4 Revenues Jump 163 Percent
 
Though Illumina officials spent the lion’s share of the conference call discussing the future of the company and 2007 expectations, the firm also reported fourth-quarter revenue of $60.4 million, a 163 percent increase over $23 million in revenue reported in Q4 2005.
 

“Our focus on the diagnostics side this year is very much on the development side to get our first diagnostics products developed, get the assays really robust and then get them submitted into the FDA for hopeful approval in 2008.”

Revenue from consumables accounted for more than half of the total revenue, according to CFO Christian Henry. The firm sold 35 BeadArray stations during the quarter, bringing to 246 the total number of instruments placed in the market, he said.
 
He noted that service and “other” revenue increased 91 percent to $11 million year over year, and said that during the quarter Illumina recognized revenue from 17 service contracts, of which four were greater than $1 million in value.
 
The company reported fourth-quarter net income of $17.1 million, or $.34 per share, compared with a profit of $300,000, or $.01 per share, in the fourth quarter a year ago. The Q4 2006 profit was negatively affected by $4.1 million in stock-compensation expense.
 
Illumina spent $8.8 million on R&D during the quarter, a 17.3 percent increase from Q4 2005.
 
For full-year 2006, Illumina brought in revenue of $184.6 million, a 151 percent increase over revenue of $73.5 million in 2005. According to Henry, instrument and services revenue grew nearly 100 percent for the year, while consumables revenue increased nearly four-fold.
 
On a geographic basis, 76 percent of Illumina’s 2006 revenue came from North America, 18 percent from Europe, and 6 percent from Asia. Flatley said that the firm intends to increasingly shift to direct sales from distributors in the Asia-Pacific region.
 
Illumina’s net profit for the year was $40 million, or $.82 per share, compared with a net loss of $20.9 million, or $.52 per share, in 2005. Its net income includes $14.3 million in stock-compensation expense. The 2005 results included a charge of $15.8 million for acquired in-process research and development associated with the acquisition of CyVera.
 
The firm’s R&D expenses for the year were $33.4 million, up 20.1 percent from $27.8 million in 2005.
 
Illumina said it expects 2007 revenue to be between $295 million and $315 million.
 
Despite the strong results, Illumina’s shares dropped 15.3 percent in the two days following the conference call.
 
The drop was due to the firm’s earning-per-share forecast of $.86 for 2007, which is significantly lower than the $1.13 previously expected by Wall Street analysts who cover the company. Company officials said that the lower guidance was due to a much higher income tax rate that would reduce earnings by approximately $.13 per share, and several million dollars more in stock-option expenses from Solexa. In addition, its R&D expenses are expected to roughly double to $57 million to $67 million.
 
In a research note published late Friday, Goldman Sachs analyst May-Kin Ho, who maintained a “neutral” rating on Illumina’s stock, speculated that the shares may also be under pressure from the company’s upcoming patent-infringement trial with Affymetrix, which is scheduled to begin on March 5.

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