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Slow Uptake of HiSeq, Reduced Reagent Use Take Toll on Illumina's Revenues

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By Monica Heger

This story was originally published Oct. 7.

Illumina this week warned that its third-quarter revenues would be lower than previously forecast due to an uncertain academic funding environment, slower-than-expected uptake of the HiSeq 2000, and reduced reagent use for its sequencing instruments.

The company said it expects preliminary revenues of around $235 million for the quarter ending Sept. 30, a decrease of about 1 percent from $237.3 million in the year-ago period and well below analyst estimates of $278 million.

Illumina expects its fourth-quarter revenues to exceed third-quarter revenues, but has suspended financial guidance for full-year 2011. Previously, Illumina forecast full-year revenue growth of between 24 percent and 26 percent over 2010 revenues of $902.7 million. Analysts now expect 2011 revenue growth within the range of 5 percent to 17 percent.

"Clearly, we are highly disappointed with our revenue for the third quarter," CEO Jay Flatley said in a statement, attributing the decline to an "unprecedented slowdown in purchasing due to uncertainties in research funding and overall economic conditions, as well as a temporary excess of sequencing capacity in the market."

He added that the company expects these conditions to continue "through at least the fourth quarter, while the 2012–2013 US budgets for NIH and other related agencies are determined."

Funding

One of the main drivers for the decline in revenue is the uncertain funding situation in both the US and Europe, which has caused the large genome centers in particular to delay instrument and consumable purchases, Illumina said.

Just last week, the Genome Institute of Washington University, a major Illumina customer, announced it would have to lay off 54 staffers due to a 23 percent funding cut from the National Human Genome Resources Institute (IS 10/4/2011). The other genome centers funded under the NHGRI's large-scale sequencing program — Baylor College of Medicine's Human Genome Sequencing Center and the Broad Institute — have not yet announced their 2012 budgets.

Analysts expect that NHGRI's move toward funding smaller-scale, hypothesis-driven studies will continue to have a negative impact on vendors selling high-throughput sequencers. For example, David Ferreiro at Oppenheimer said last week that NHGRI's "doctrinal shift" toward funding "research that drives elucidation of disease pathophysiology, and not just sequencing to sequence" will represent a "headwind for high-throughput system sales moving forward."

In a note issued after Illumina released its preliminary results, Ferreiro said that this evolution in NIH's funding strategy is likely to cause "continued erosion" of Illumina's core high-throughput sequencing business.

While some decline in NIH spending was expected, Isaac Ro of Goldman Sachs noted that the "magnitude" of Illumina's decline "comes as a surprise" since funding concerns "mainly centered around the outlook for 2012 and expectations were for a solid [third quarter."

While Goldman Sachs anticipated genome centers to eventually cut back in spending, "we did not anticipate such a rapid deceleration to manifest this quarter," Ro said.

Too High-Throughput?

Oddly, Illumina seems to be a victim of its own success in a sense, since the capacity of its sequencers is currently outpacing demand. The company reported that the launch of its version 3 sequencing kits for the HiSeq "created excess capacity that customers were unable to fully utilize," resulting in fewer runs and lower consumable revenue per instrument.

Indeed, even some early MiSeq customers have said that the HiSeq's throughput is greater than what many users need (IS 9/20/2011).

The V3 chemistry was launched in the second quarter and increased the throughput of the HiSeq three-fold to 600 gigabases while also improving data accuracy, the company said (IS 8/2/2011).

In addition, fewer customers than expected have upgraded from Genome Analyzers to HiSeqs. While the large-scale sequencing centers appear to be fully converted to HiSeqs and are using the machines to full capacity, according to William Blair research analyst Amanda Murphy, single HiSeq users, "which have become a bigger portion of the installed base over time, remain underutilized and are thus using less reagent, particularly with the recent threefold jump in output."

Murphy estimates Illumina will place 62 HiSeq machines in the third quarter and 55 in the fourth, down from previous estimates of 70 and 64, respectively, and well below the 140 and 120 instruments placed in the first and second quarters.

She added in her report that the firm is "most concerned about the inability for users to digest the amount of capacity that is now generated on sequencing machines, given our view that consumables are the key growth engine of company."

Not only HiSeq customers, but also the installed GA base used fewer reagents than expected this quarter, Illumina said.

Improvements to sample-prep and bioinformatics will help alleviate the issue, Murphy wrote, but the problem seems to be worse than anticipated, due especially to funding issues.

As a result, William Blair lowered its GA consumable revenue estimate for 2011 to $131,000 from $139,000.

MiSeq a Saving Grace?

Despite the overall bad news, the MiSeq proved to be a bright spot within the company. Since mid-September, Illumina has shipped 45 systems, and as of the second quarter, it had taken orders for more than 135 instruments.

According to Flatley, the launch has "gone extremely well," and the system is "performing beyond our expectations in the hands of our customers."

How much of the benchtop sequencing market the MiSeq will eventually capture is still unclear, however, and it remains in fierce competition with Life Technologies' Ion Torrent PGM (IS 9/13/2011).

Looking ahead, Murphy provided best-case and worst-case scenarios for Illumina. While the firm estimates a decline in HiSeq instrument revenue in 2012 at between 44 percent and 22 percent, translating to 180 to 260 instruments shipped, the MiSeq should help make up some of that loss, with forecasted shipments of between 450 and 750 systems.

Overall, in 2012, the company could see revenue growth of 19 percent, or a loss of 7 percent, Murphy predicted.


Have topics you'd like to see covered by In Sequence? Contact the editor at mheger [at] genomeweb [.] com.

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