From GS:
ILMN reported a Q2 loss of $0.28/share excluding a 1 time litigation- related
accrual of $7.7MM. The loss was $0.02 worse than our est due to lower
interest income. We maint our 2002 & 2003 loss est of $1.13 & $1.02,
respectively. We expect the oligo & services businesses to be the main
revenue drivers until ILMN launches a proprietary commercial genotyping
system by yearend which will replace the system under delayed development
w/ABI. In 2002, ILMN signed 12 service contracts, surpassing the original
goal of 10. 2002 milestones include: 1) add a 2nd service application, 2) build
out commercial marketing channels, & 3) launch a proprietary product. We
maintain our MO rating.
1. DETAILS OF SECOND QUARTER LOSS OF $0.28
Revenues of $1.9 million were $0.3MM below our estimate due to negative
quarterly fluctuations. Total expenses of $11.0MM, excluding a one time
accrual of a $7.7MM legal charge, were $0.5MM lower than our estimate due
to positive quarterly fluctuations. In July, Illumina announced that it
would accrue a $7.7MM charge associated with an adverse ruling in a
termination-of-employment lawsuit, involving Illumina’s former CFO.
Illumina has appealed the ruling. Investment income of $0.4 million was
$0.8MM lower than our estimate due to the lower interest rate environment.
The net loss was $8.7 million or $0.28 per share on 30.7 million basic
shares.
2. MAINTAIN 2002 AND 2003 LOSS ESTIMATES
Prior to commercial launch of Illumina’s genotyping system, we expect
revenues to be driven by the oligonucleotide business and SNP genotyping
service agreements. We maintain our 2002 and 2003 loss estimates of $1.13
and $1.02, respectively.
3. ABI SYSTEM DELAYED. PROPRIETARY GENOTYPING SYSTEM TO BE LAUNCHED IN
Q4/02
In July, Illumina announced the launch of the genotyping system in
development with ABI would be postponed until Q4/02 due to a delay in
optimizing Illumina’s array technology with ABI’s scanners. Simultaneously
Illumina announced that it plans to begin shipment of a proprietary single
nucleotide polymorphism (SNP) genotyping system in Q4/02. The system is
capable of delivering over 1MM genotypes per day. Illumina has developed in
house the scanner, lens, and assay technology that ABI has contributed to
the collaboration.
By launching its proprietary system, Illumina will not need to share
profits with a partner. Illumina plans to target the 20-30 genotyping
centers with high throughput needs of over 1MM genotypes per day. Although
ABI could contribute considerable marketing capabilities to the
collaboration, Illumina has hired a small sales force (5 people worldwide)
that should effectively target these high-throughput accounts. Management
has also indicated that there is overlap between the 12 service contracts
that Illumina has entered into and the targeted high-throughput centers,
which may facilitate the conversion of service agreements to commercial
contracts. A proprietary Illumina system will also make it easier for
commercial customers to expand into proteomics and gene expression using
Illumina technology. According to management, an upgrade in the software
module is all that is required to expand Illumina’s proprietary system
while more significant upgrades would have been necessary to convert the
ABI system.
4. MAINTAIN MO RATING
There is increasing interest in SNP analysis among pharmaceutical
companies. However, wide adoption is restricted by high cost per data point
and low throughput. Illumina’s system is well suited to address these
hurdles. Illumina is developing next generation technologies to analyze
genetic variation and function at increased throughput and lower cost. We
maintain our Market Outperformer rating.
Although Illumina has not disclosed immediate plans for the ABI
relationship, management indicated that they would evaluate the partnership
and provide an update when available. It may be beneficial for Illumina to
revise the ABI agreement, as any system that is eventually introduced by
the partnership could compete directly with Illumina’s. Illumina has
recognized approximately $15MM in funding from ABI, including a $5MM equity
investment and $10MM in deferred revenue, which ABI will recoup as product
expense.
5. SURPASSED GOAL OF 10 GENOTYPING SERVICE AGREEMENTS IN 2002
In 2002, Illumina entered a total of 12 service agreements surpassing its
initial goal of ten. During the second quarter Illumina announced seven
additional genotyping service agreements, including one with Ernest Gallo
Clinic & Research Center (EGCRC). In the EGCRC agreement, Illumina will use
its bead array technology to map SNP loci for neurobiological traits
potentially associated with alcoholism. Illumina has previously signed
service agreements with: Oxagen, Boston University, and John Hopkins.
Illumina’s 2002 milestones are as follows:
- Launch a proprietary commercial product
- Add a 2nd application to its services business
- Expand commercial marketing channels, including the establishment of a
small European sales force, to leverage its expanded service offering
*- Sign 10 genotyping service agreements |
