Illumina’s Q3 2013 revenues indicate that our aggressive forecast of 20% CAGR for the NGS market over the next 3 years has room for upsidesBy Stephane BudelOn October 21 2013, Illumina discussed Q3 2013 earnings in a call with analysts. The company reported another strong quarter easily beating analyst consensus ($357M vs. $344M consensus).Overall, the quantitative and qualitative information released during the call support the analysis and forecast in our NGS report. As a result, we reiterate our aggressive 20% CAGR for this market, and note that potential upsides are possible. We continue to believe that clinical diagnostics NGS market is ready to take off, and if anything, is likely to progress at a pace even more rapid than the already quick ramp we predicted.We outline some of the key points from the earnings call related to NGS below:Overall revenues:

• Illumina delivered its 8th quarter of consecutive revenue growth; overall revenues grew 25% y-o-y to reach $357M
• Illumina’s customer base continued to expand and diversify; ~45% of all shipments went to non-academic labs, including commercial, non-profit and hospital customers. As a result, the company is well on track to reach its goal to derive more than half of its revenues from non-governmental customers within the next 5 years
• The government shutdown ended up having minor effects on Q3, and is expected to have limited impact on Q4. This lack of effects was in part due to researchers continuing to prioritize their current budget for NGS experiments (and potentially delaying purchase of products, instruments or services of other technologies)
• Overall sequencing revenues grew 37% y-o-y (accelerating from 33% in Q2 2013 y-o-y), driven by high demand for consumables and HiSeq 2500 instruments
• Overall instrument revenues grew 21% y-o-y, and consumable revenues grew 22% y-o-y (currently representing 60% of overall revenues)
• By geography, revenues grew 25% y-o-y in the Americas, 27% y-o-y in Europe, 22% y-o-y in APAC (driven by sales in Japan)

Microarray revenues:

• Microarray revenues declined 3% y-o-y, despite a sustainable demand for genotyping services (>90K consumer, AgBio and research samples)
• Illumina observed a continued trend toward larger sample numbers at lower complexity (and lower ASP per sample). As a result, the company is introducing a novel Infinium product that can process 24 samples per chip
• Internal DeciBio data confirms price elasticity (especially from Biopharma and applied market customers), enabling some portion of the market to be unlocked by price decrease

Sequencing instruments:

• Sequencing instrument revenues grew 26% y-o-y, driven by HiSeq 2500 demand (>100 units shipped, only the 4th quarter in the last 4 years since HiSeq became available); >80% of HiSeq shipments were for the 2500 (rather than the 2000), given the ability of this platform to perform rapid runs
• ~40% of HiSeq customers were new customers, half of which were located outside the U.S.
• Current customers remain capacity constrained, resulting in >50% of orders coming from current customers.
• >50% of MiSeq were ordered by non-academic customers, including Biopharma and clinical customers
• MiSeq reagent pull through were below the $45-50K range, in part due to these instruments being place with new customers (not running the machine at full capacity). As a result, Illumina now projects MiSeq pull-through to be in the $40-45K range

Sequencing reagents:

• Sequencing consumable grew 38% y-o-y (including 25% growth y-o-y for sample prep reagents, such as the Nextera product line)
• HiSeq reagent pull-through remained "well within" the $300K - 350K range per instrument
• The company announced a continued focus on robotics to facilitate workflow and improve overall ease of use
• The company released a new MiSeq kit that enables 15 Gb runs thanks to a mix of increased number of reads and overall read length. This throughput is at a sweet spot for some key applications such as exome sequencing and RNA-Seq. As a result, 20% of MiSeq reagent revenues in this quarter came from this new kit
• 200 customers to date have used the MiSeq TruSight, primarily the tumor, inherited cancer and exome set
• Illumina also introduced the TruSight 1 panel, which includes >4,800 with known associated clinical phenotypes
• MiSeq reagent pull through were below the $45-50K range, in part due to these instruments being place with new customers (not running the machine at full capacity). As a result, Illumina now projects MiSeq pull-through to be in the $40-45K range

Sequencing services:

• With its FastTrack services, Illumina shipped >3,000 whole genomes in Q3 2013, almost a 90% y-o-y increase over its 1,600 genomes a year ago.
• In Q3 2013, the company received >10,000 orders for whole genomes, a new record
• The company also announced the start of a 3-year project in collaboration with the University of Cambridge and Genomics England to sequence 10,000 whole genomes of children and young adults with rare genetic diseases. This project represents the first step of an overall U.K. effort to sequence 100,000 genomes.
• Overall service revenues (including Verinata services; see below) grew 60% y-o-y

NIPT and Verinata:

• Illumina mentioned seeing “very rapid” adoption of non-invasive prenatal testing (NIPT)
• Verinata announced it was 1 of 2 providers able to service the New York state as a result of the laboratory permit Illumina received for the Verifi tests.
• Illumina extended the capabilities of verifi test to include women pregnant with twins
• In Q3 2013, Illumina signed a supply agreement with Natera

Product announcements and R&D efforts:

• Illumina announced its intention to exit the qPCR market to focus its R&D effort on its core business; Eco qPCR systems and reagents will not be sold anymore
• In Q3 2013, adjusted R&D expenses was $61M (17.2% of revenue), compared to $59M (17% of revenue in Q2 2013).

Comments on Illumina’s strategic direction:

• The company has reorganized for growth; a week ago, Illumina announced organizational changes to enter into effect on Jan 1, 2014, and enabling 1) continued growth in existing markets, 2) movement into new markets, and 3) further unlocking growth in clinical settings
• The company remains focused on enhancements to its core technology in areas such as long read (Moleculo) and ordered arrays
• The company appears to continue its focus on BaseSpace, its integrated cloud ecosystem. >13,000 launch of applications housed by its App store have happened to date
• Regarding its oncology division, the company intends to invest in solutions that enable customers to develop their own content (e.g., improved workflow / sample preparation) rather than developing proprietary positions in specific tests
• For clinical sequencing, the move away from panels seems to be accelerating faster than we predicted. Illumina‘s rough estimate place whole genomes at 5-10%, exomes at 25-30% and target panels at ~60%+.

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Authors: Stephane Budel, Partner at DeciBio, LLCConnect with Stephane Budel on Google+https://plus.google.com/+StephaneBudel