Illumina Inc. (Nasdaq: ILMN) manufactures instruments that are used to study DNA. The company's products allow researchers to study an individual's genetic makeup, sequence genomes, and determine the specific genetic causes of diseases. Illumina's systems have three components: readers, reagents, and one-time-use arrays. Much like its competitors Affymetrix and Applera, Illumina sells the readers at low margins and generates its revenue and income from the sale of disposable arrays and reagents, which are replaced after each procedure. Each reader generates approximately $600,000 in disposables revenue per year.
Illumina's customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, and biotechnology companies. Illumina develops and commercializes sequencing technologies used to perform a range of analyses, including de novo sequencing, whole genome re-sequencing, gene expression analysis, and small RNA analysis. Its product and service offerings also include solutions for single-nucleotide polymorphism (SNP) genotyping, copy number variation (CNV), deoxyribonucleic acid (DNA) methylation studies, gene expression profiling, and low-multiplex analysis of DNA, small ribonucleic acid (RNA), and protein.
Illumina has expanded its product portfolio in the last few years, with the acquisitions of CyVera in 2005 and Solexa in 2007. The fastest DNA sequencer of the last generation was the 3730xl from Applera, capable of sequencing one million bases of DNA per day. In contrast, Illumina's Genome Analyzer can sequence over 600 million bases per day. Next-generation products greatly decrease the cost of sequencing DNA. The falling costs of sequencing have opened up new markets for companies like ILMN. The company has partnered with 23andMe, a Google financed startup that analyzes individual customers' genotypes for various diseases.
Second Quarter 2010 Results
Illumina reported revenue for the second quarter of 2010 of $212.0 million, a 31% increase over the $161.6 million reported in the second quarter of 2009. GAAP net income for the quarter was $29.8 million, or $0.21 per diluted share, compared to net income of $24.7 million, or $0.18 per diluted share, for the second quarter of 2009. Net income for the second quarter of 2010 included $5.2 million in non-cash interest expense. Non-GAAP net income for the quarter was $34.0 million, or $0.26 per diluted share, compared to $29.2 million, or $0.22 per diluted share, for the second quarter of 2009.
In its DNA sequencing systems, the Company applies the SBS biochemistry on microscopic islands of DNA, referred to as DNA clusters. Each cluster starts as a single DNA molecule fragment, typically a few hundred bases long, attached to the inside surface of a flow cell. It then uses an amplification biochemistry to create copies of each starting molecule. As the copies are made, they are covalently linked to the surface, so they cannot diffuse away. After a number of cycles of amplification, each cluster might have approximately 1,000 copies of the original starting molecule, but still be only about a micron (one-millionth of a meter) in diameter. By making so many copies, the fluorescent signal from each cluster is significantly increased. As the clusters are so small, hundreds of millions of clusters can be independently formed inside a single flow cell. This large number of clusters can then be sequenced simultaneously by alternate cycles of SBS biochemistry and fluorescent imaging. Sequence reads are aligned against a reference genome and genetic differences are called using specially developed data analysis software.
Illumina’s BeadArray technology combines microscopic beads and a substrate in a simple manufacturing process to produce arrays that can perform many assays simultaneously, enabling large-scale analysis of genetic variation and biological function. Its BeadArray technology consists of two-micron silica beads that self-assemble into microwells etched into an array substrate. It has deployed its BeadArray technology in two different array formats, the Array Matrix and the BeadChip.
Illumina’s VeraCode technology platform leverages the power of digital holographic codes to provide a robust detection method for multiplex assays requiring high precision, accuracy, and speed. Each VeraCode bead type is inscribed with a digital holographic code to designate and track the specific analyte or genotype of interest throughout the multiplex reaction. When excited by a laser, each VeraCode bead emits a code image, allowing for quick and specific detection by Illumina’s BeadXpress Reader System.
In July 2010, Illumina acquired Helixis Inc.
Many of the customers in these markets are government organizations, such as the National Institute of Health, or research institutions that rely heavily on government-funded research grants. Any decrease in government funding would severely impact Illumina and other companies in this R&D-intensive industry. About 65% of Illumina’s revenues come from government and academic customers, who are heavily dependent on grant funding, while 35% come from corporate customers. Moreover, Illumina also sells its products to pharmaceutical and biotechnology industries, a field where consolidation is frequent. The risk of losing large customers due to mergers and consolidation is also significant.
Customers for gene sequencing technology increasingly come from outside the 10 major genome research centers such as the J. Craig Venter Institute and the Broad Institute. Illumina is at the forefront of this trend, with 90% of its customers for its Genome Analyzer coming from outside the genome centers. International opportunities are also increasing, not just in Europe, but also in China and India. Illumina earns 43% of its revenues from abroad, and with emerging economies booming, many governments are expanding funding for life sciences research. However, their sales abroad are generally denominated in dollars, so they do not benefit from the weak dollar. Europe is home to many of the world’s largest research centers, but they are also heavily dependent on grants. China and India present growth opportunities for genomics research, thanks to more affordable and accessible research techniques. For example, Illumina installed 11 Genome Analyzers last quarter at the Beijing Genomics Institute, bringing its total to 17. It should be noted, however, that Illumina competitor Applera has over 100 installed last-generation sequencers at the Beijing Genomics Institute.
The cost of sequencing an entire genome has fallen (and continues to fall) rapidly toward the long-expected $1000 genome, leading to the rise of companies that offer sequencing of individuals’ genomes and tests for various genetic disorders. Given the size of the consumer market, it would not require massive use of these services to make them successful. If 1% of the populations of New York, San Francisco, and Los Angeles were to use one of these services, those 300,000 tests would translate to $150 million in revenue for the company (Illumina or its competitors) providing the sequencing technology. Even though these companies are still startups, the size of the potential market makes them quite important. Illumina provides the instruments to two of the companies, 23andMe, which charges $999 per individual, and deCODE Genetics, which charges $985. Illumina has actually entered into a joint development agreement with deCODE Genetics to develop tests for genes linked to heart attacks, type 2 diabetes, and breast cancer.
The commercial microarray market today is dominated by four companies: Affymetrix, Agilent, Illumina, and Roche/NimbleGen. Most other competitors, such as GE Healthcare and Applera, have exited the market. Affymetrix leads this market, with over 50% market share, although that dominant position is under attack from competitors. Agilent, a Hewlett-Packard spinoff, focuses on lower-cost products and has approximately 12-13% market share. Roche/Nimblegen is by far the smallest company in the pack, and focuses largely on newer applications of products for genotyping. Illumina produces high-end products for genotyping, and charges a substantial premium for its products, in contrast to Affymetrix, which competes on price. While Illumina has substantial market share in genotyping and makes 80% of its revenues in this market, it has a much smaller share in gene expression, where it has been unable to steal customers from Affymetrix. Genotyping is an approximately $600 million market, growing at approximately 20% per year, and gene expression is a $700-750 million market, growing much more slowly at 3-5% per year. As a result of Illumina's strong position in the faster-growing market, analysts expect it to overtake Affymetrix in sales of consumables in the next 12-18 months.
The DNA sequencing market is about a $900 million market, but market analysts expect it to expand significantly with the entry of the next generation of sequencing technologies, such as Illumina’s Genome Analyzer, as the cost of sequencing decreases, making it more accessible. According to analysts at market research firm Frost and Sullivan, this market will grow at 10.4% for the next few years, becoming a $1.5 billion market by 2012. Illumina’s competition in this market consists largely of Applera. Roche is present through acquisition here as well, through its purchase of 454 Biosciences. Helicos BioSciences has a high-potential technology in its HeliScope system, but it only shipped its first reader in March 2008 and is not as well-known as its competitors. Despite Illumina's early launch and initial orders, Applera's SOLiD system has significant advantages despite its late launch, such as the presence of its last-generation predecessor in many laboratories and a long history of DNA sequencing expertise. Applera's last-generation machines, the 3730xl sequencers, have over 70% of the market, with over 10,000 installed.
|(all figures in millions)||Illumina||Affymetrix||Applera||Agilent||Roche|
|Net Profit Margin||-75.89%||13.65%||14.63%||10.99%||24.79%|
|Return on Assets||-45.69%||6.87%||11.25%||5.33%||14.63%|
|Return on Equity||-84.48%||10.18%||21.13%||17.80%||21.45%|
Molecular diagnostics, at $2 billion, is the largest and most competitive market in which Illumina operates. Established competitors in this market include Abbott, Applera, Cepheid, Gen-Probe, Luminex, and Roche. Illumina only entered the market in March 2007, but it has entered into partnerships to develop tests for various diseases, not just with deCODE, but also with the Mayo Clinic for several complex diseases, and with the Children’s Hospital of Eastern Ontario for screening children for various genetic disorders.