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Seeing High Demand for Next-Gen Sequencers, Illumina, ABI Ramp Up Production, Marketing

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As the market for next-generation sequencers is picking up pace, Illumina and Applied Biosystems are shifting to a higher gear.
 
Last week, Illumina said it has received more than 95 orders in total for its Genome Analyzer, which it commercially launched earlier this year, exceeding initial expectations. To satisfy customers’ appetite for the new platform, and to reduce its order backlog, Illumina is currently increasing its manufacturing capacity, and adding new staff in marketing, sales, and support.
 
ABI, feeling the heat, said last week that it had decided to move up the full commercial launch of its SOLiD sequencer to October from early 2008. It, too, expects an initial backlog of orders for its new system.
 
“The sequencing business is performing beyond our expectations and holds great promise,” said Jay Flatley, Illumina’s chief executive officer, during the company’s second-quarter earnings conference call last week (see story below for detailed financials).
 
Last month, Illumina said it had received more than 75 orders in total for the Genome Analyzer, which it broadly launched earlier this year, including 16 units that are already installed at the Broad Institute. Last week, the company revealed that earlier this month, it received another order for 20 instruments from a single, unnamed customer, plus an undisclosed number of orders from other customers, bringing the total number of ordered systems to more than 95. Illumina did not disclose how many of these systems are currently installed.
 
For comparison, 454 Life Sciences installed 20 of its Genome Sequencer instruments in 2005, its first year of sales, and had an installed base of over 60 units by the end of 2006. Roche, which acquired 454 in May, did not disclose the total number of installed 454 units in its most recent earnings report, though it did note that strong sales of the Genome Sequencer 20 and GS FLX systems contributed to 9 percent revenue growth for its Applied Sciences business (see In Sequence 7/24/2007)
 
Growth Beyond the Genome Centers
 
Flatley said that more than half of Illumina’s Genome Analyzer orders are from outside the core genome centers — an unexpected trend. “Probably the thing that surprised us most is how broadly the system has been accepted outside the genome centers, and how rapidly we are progressing on this,” Flatley said. Demand at the genome centers has been “at or above” what the company had anticipated.
 
Initially, he said, genome centers tested out different applications for the platform, but increasingly, they are shifting them to production mode, most likely for sequencing rather than gene expression applications.
 
The pharmaceutical industry, on the other hand, has not developed a taste for the Genome Analyzer yet, and the company is not counting on more business from pharma companies in its revenue projections, Flatley said. “I think on the expression side, there is certainly the possibility that big pharma could begin to look at next-generation sequencing for other applications, like expression, or methylation analysis, or other types [of] studies, but not so much for pure sequencing.”
 
The system is also not currently used by reference labs for clinical diagnostics. “We certainly think … diagnostic sequencing is going to be a great opportunity, but today, that’s not really what we are focused on,” Flatley said. “I think that application is a few years away from being a significant revenue contributor for us.”
 
Flatley offered several reasons why the platform is becoming so popular among users. Sequencing costs are lower on the Genome Analyzer than in traditional Sanger sequencing, and throughput is higher. “Customers universally are astonished by the amount of data they can get out of these products, and what they get on a per-dollar-invested basis is remarkable,” he said.
 
In addition, unlike in Sanger sequencing, no large and costly sample-prep infrastructure is needed. “This enables almost any university laboratory to purchase one of these systems, and have a real impact doing DNA sequencing,” he said.
 
Flatley also mentioned that the growing number of applications for the Genome Analyzer, beyond traditional genome sequencing, makes the system attractive to customers. Last week, he pointed out, Illumina launched kits for tag-based expression profiling and small RNA discovery on the sequencing platform (see In Sequence 6/24/2007).
 
Other applications are still in development, Flatley said, such as kits for chromatin immunoprecipitation, or ChIP, sequencing — an application that several research labs have already explored on their own — as well as kits for whole-transcriptome gene expression analysis and for paired-end reads.
 
The company has high expectations for the latter. “Our view is that paired-end technology is so powerful that the vast majority of users with sequencers will migrate toward paired-end reads over the next six to 12 months,” Flatley said. “If you were to look 12 months out, we might guess that two-thirds of all applications might be done using paired-end reads.”
 
Illumina is also hopeful for full-transcriptome sequencing, which Flatley thinks is “going to revolutionize gene expression,” so the company is “working hard on that application.”
 
But despite these prospects, arrays, at least genotyping arrays, are here to stay for the time being, he believes. “While the sequencing costs are coming down, the array costs are coming down as well, and there remains a very large gap between what it takes to sequence someone and what it takes to genotype someone.”
 
Gene expression applications, on the other hand, “may migrate more to sequencing than genotyping will because of the added power you get from doing sequence-based expression, and the quality of the digital data that you get from sequencers.”
 
In addition to the application-specific kits Illumina is working on, users of the Genome Analyzer are developing their own applications. “We are excited to collaborate with customers and bring those applications into things that are [going to be] formally launched as products,” Flatley said.
 
Dealing with Demand
 
To keep up with the unexpected demand, and to reduce its order backlog, Illumina has boosted both its manufacturing capabilities and its sales and support teams.
 
Flatley said the company has increased its manufacturing infrastructure both at its Hayward, Calif., and its Little Chesterford, UK, facilities and is “continuing to increase the capacity in anticipation of strong ongoing demand.”
 
But he declined to say how long customers who currently have a sequencer on order will have to wait to receive it, other than stating that the company expects to be shipping instruments to customers “in the kinds of timeframes they would like them.”
 
In the future, he said, Illumina wants to be able to deliver an order of 20 units “in, say, 30 days as opposed to some longer period.”
 
Illumina is also hiring on the marketing, direct sales, and technical support side, in particular in order to serve customers outside of genome centers, Flatley said.
 
He acknowledged that this is holding the company back somewhat. “Our hiring requirements are pretty steep, and we are struggling a little bit there, but I think we are doing overall fine in bringing on sufficient people,” he said.
 
Will Illumina continue on its current trajectory once ABI comes to market with its SOLiD system?
Being first to market with an ultra-high-throughput sequencer has apparently helped the company capture several large deals. Flatley attributed those sales to customers who require next-gen sequencing capabilities today rather than tomorrow.
 
“I think the large orders will go to that technology that is performing the best at any given point in time,” he said, adding that “we are grateful to be in the position where we have this technology fully available, and can take advantage of the demand coming from these centers. And it will be imperative for Illumina to make sure that we stay ahead and that the platform continues to perform as well, or better, in the marketplace than any competing technology.”
 
ABI’s Answer
 
Applied Biosystems appears to remain unfazed by remarks like these. “If you listen to the other guys, there is no way to stop them,” quipped Tony White, president of Applied Biosystems, during the company’s fourth-quarter earnings call last week.
 
He believes the game is not over yet. “This is a market that is going to play out over the next several years, not the next several months,” he said, noting that ABI’s longstanding market presence in sequencing will work to its advantage.
 
“We intend to compete vigorously in this new market [of next-generation sequencing], drawing on our deep relationships with sequencing labs worldwide.”
 
Though ABI does not believe that its SOLiD platform will come to dominate the market for next-generation sequencers in the same way that its capillary electrophoresis sequencers have dominated Sanger sequencing, the company certainly hopes that it will capture a good slice of it. “Some of the competitors will be a better solution for some applications, and hopefully, we will be a better solution for many applications,” White noted.
 
The first step was getting the system to run in users’ labs. Last month, the company shipped its first SOLiD systems to early-access customers, and has been “pleased with the performance in the customers’ hand.” It has also seen “a lot of interest in this product around the world,” according to White.
 

“While next generation sequencing will cannibalize part of the current high-end CE sequencing business, we believe it will also expand the high-end market overall by enabling new applications.”

“[We] got very positive feedback from these customers that also had experience with competitive units running side by side,” added Mark Stevenson, who was just promoted from president of the molecular and cell division to executive vice president (see Paired Ends in this issue).
 
As a result, the company said last week it has decided to accelerate the full commercial launch of the system, with the initial rollout now targeted for October instead of early 2008. ABI expects to book revenues for the systems about three months after shipping them, once they have met the customers’ acceptance criteria.
 
White acknowledged that “the noise some of the competition has been making” played a part in the company’s decision to move up the launch. “We probably have been influenced a little bit by that,” he said.
 
As part of the early launch, ABI is going to ramp up its manufacturing capacity, but still anticipates more orders than it can initially handle. “We are pretty confident that in the early stages of this [launch], we are going to have a backlog,” White said, “but we don’t know how long it will last.”
 
The company believes that its initial customers for the SOLiD system “will be primarily genome centers, large academic core labs, and larger commercial service labs,” according to White, which all have not only a need for high-throughput sequencing technology but also possess the required IT expertise to handle the data.
 
Those labs currently represent less than 10 percent of ABI’s capillary electrophoresis sequencing business, Stevenson said, and will therefore likely not compromise that business much.
 
“While next generation sequencing will cannibalize part of the current high-end CE sequencing business, we believe it will also expand the high-end market overall by enabling new applications,” White said. “And we believe this will not affect the larger markets where CE will continue to be the technology of choice.”
 
Capillary electrophoresis systems will continue to be used by small- and medium-sized labs as well as by customers in forensics and by pharmaceutical companies for quality control purposes, ABI predicted.
 

 
ABI Sees Turnaround for DNA Sequencing Business in Q4
 
ABI’s DNA sequencing business grew for the first time after four years of consecutive decline, although at a minimal rate. The company reported $138.6 million in revenues for its DNA sequencing business during the quarter that ended June 30, up 1 percent compared to the year-ago quarter.
 
DNA sequencing accounted for a quarter of ABI’s overall revenues during the quarter, which totaled $557.3 million. A year ago, sequencing made up a similar proportion of overall revenues. Total revenues grew about 7 percent over last year’s quarter.
 
Research, development, and engineering costs increased 16 percent to $53.5 million during the quarter, from $46.3 million in the prior-year quarter. That increase was mostly due to investments in the development of the SOLiD next generation sequencer, as well as the Ambion product line and other products.
 
The company had net income of $87.8 million during the quarter, up from $76.7 million during the year-ago quarter.
 
For fiscal year 2008, which started in July, ABI anticipates modest growth in the DNA sequencing product category. It also expects increased R&D costs in the current quarter related to the SOLiD sequencing system.
 
As of June 30, ABI had $495.5 million in cash and short-term investments.
 

 
Sequencing Sales Drive Q2 Revenue Growth for Illumina 
 
Illumina reported $84.5 million in total revenues for the second quarter, about double the $41.6 million it booked during the year-ago quarter. Though the company did not break down how much specific platforms or applications contributed to its revenues, it said they were “fueled by growth across all three platforms,” including the Genome Analyzer.
 
Research and development expenses totaled $18.2 million, up from $8.6 million during the second quarter of 2006. Expenses for the second quarter of 2007 include Solexa’s R&D expenses.
 
Illumina’s net income for the quarter was $9.3 million, up from $6.8 million during the same quarter last year.
 
The company expects third-quarter revenues of between $88 million and $92 million, and third-quarter net income of between $16 million and $18 million. It now expects $335 million to $345 million in total revenues for the year, $30 million more than it had predicted in April.
 
As of July 1, Illumina had $81.1 million in cash and cash equivalents, and $262.1 million in short-term investments.

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