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Illumina (ILMN)Stock (Biotechnology Industry, Molecular Diagnostics Industry, Pharma & Healthcare Industry)
 Illumina Inc. (Nasdaq: ILMN) makes 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 and 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.[1] 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.[2] Next-generation products greatly decrease the cost of sequencing large chunks of 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. That said, as of Q1 2008, most of ILMN's customers were research institutions. These institutions depend on government-funded grants which have fallen by 7.5% from 2004 to 2007.[3]
[edit] OverviewIllumina operates in several different product markets, all of them fast-growing. Illumina has three product lines for four markets:BeadStation, Genome Analyzer, and BeadXpress.
For genotyping and gene expression, Illumina sells arrays based on its proprietary technology. These arrays, along with various reagents, are the disposable components of an integrated system that also includes its BeadStation readers. Illumina also participates in the gene sequencing market with its Genome Analyzer stations, the first next generation system to market, which had over 200 orders as of the first quarter of 2008. The stations are sold at low margins, and Illumina then provides the disposables for prices ranging up to $3,500. Illumina also entered the molecular diagnostics market in March 2007 with its BeadXpress line of readers, based on technology from its 2005 acquisition of CyVera. [edit] Business FinancialsDespite its rapid revenue growth, Illumina has not been consistently profitable. It had nearly $40 million in net income in 2006, but recorded a net loss of $278 million in 2007 on charges from its acquisition of Solexa, and from its $90 million payment to Affymetrix for settling a patent infringement lawsuit. While Illumina is not organized along product lines, it is still possible to see the impact of each of their main lines of business on the company’s bottom line, based on the number of stations they sell. Since the stations drive consumables demand, the number of stations ordered is a key metric for Illumina’s revenue growth. While many of the 300+ BeadStations have already been installed, some of the 200+ Genome Analyzers have been shipped, but not fully installed, so they do not yet provide as steady a flow of revenue as the BeadStations. Moreover, many of the BeadXpress readers are orders, so their impact on the bottom line will not be felt until later this year.[7] [edit] Trends and Forces[edit] A highly concentrated market poses significant growth and revenue risksMany 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.[9] 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. [edit] Growing international and alternative markets open to next-generation gene sequencing technologyCustomers 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.[10] 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.[11] 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.[12] It should be noted, however, that Illumina competitor Applera has over 100 installed last-generation sequencers at the Beijing Genomics Institute.[13] [edit] The sharply decreasing cost of sequencing is leading to the rise of consumer genomics companiesThe 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.[14] [edit] CompetitionIllumina faces significant competition in most of its product categories, notably from Affymetrix, Agilent, Applera, Sequenom, and Roche through its acquisition of NimbleGen. [edit] Genotyping and Gene ExpressionThe 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.[15] 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[16], and gene expression is a $700-750 million market, growing much more slowly at 3-5% per year.[17] 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.[18] [edit] DNA SequencingThe 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.[19] 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.[20]
[edit] Molecular DiagnosticsMolecular 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.[21] 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[22], and with the Children’s Hospital of Eastern Ontario for screening children for various genetic disorders.[23]
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