From GS 10/30:
ILMN reported a Q3 loss of $0.24/share excluding a litigation judgmentrelated
interest expense of $0.16MM. The loss was $0.05 better than our
est due to lower R&D expenses. Based on the $0.05 upside in Q3, we have
revised our 2002 loss est per share by $0.05 to $1.08. We maintain our
2003 loss est per share of $1.02. ILMN has launched its proprietary
commercial genotyping system and continues to sign services agreements.
We expect the oligo nucleotide & services businesses to be the main
revenue drivers until ILMN begins shipping the genotyping system. The
system under development w/ABI remains delayed. We maintain our MO
rating based on its unique and broadly applicable technology platform.
Risks to our view include lower sales, delay in product launches and
dependence on financial markets.
RECOMMENDATION: WE CONTINUE TO RATE MARKET
OUTPERFORMER based on Illumina’s unique and broadly applicable
technology platform, recent launch of its proprietary genotyping, and
growing momentum in signing services agreement. There is increasing
interest in single nucleotide polymorphism (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.
1. Q3 LOSS OF $0.24/SHARE, $0.05 BETTER ON LOWER R&D EXPENSES
Revenues of $3.0 million were $0.2MM above our estimate due to positive
quarterly fluctuations. Total expenses of $11.0MM, excluding $0.16MM of
interest expense related to a litigation judgment, were lower than our
estimate primarily due to R&D expenses of $6.4MM, which were $1.2MM lower
than expected. 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
decision. Until the outcome of the appeal is known (expected late
2003/early 2004), Illumina will likely recognize $0.16MM in interest
expense quarterly associated with the litigation judgment. Investment
income of $0.4 million was $0.1MM lower than our estimate due to the lower
interest rate environment and lower cash balances. The net loss was $7.6
million or $0.24 per share on 31.1 million basic shares.
2. REVISED 2002 LOSS ESTIMATE; MAINTAIN 2003 LOSS ESTIMATE
Prior to sales of Illumina’s SNP genotyping system, we expect revenues to
be driven by the oligonucleotide business and SNP genotyping service
agreements. Due to the $0.05 upside in the third quarter, we have revised
our 2002 loss estimate per share by $0.05 to $1.08. We maintain our Q4/02
and 2003 loss estimate of $$0.27 and $1.02, respectively.
3. ANNOUNCED LAUNCH OF PROPRIETARY GENOTYPING SYSTEM; ABI SYSTEM REMAINS
DELAYED
In July, Illumina launched its proprietary genotyping system and
simultaneously announced that the launch of the system in development with
ABI would be postponed due to a delay in optimizing Illumina’s array
technology with ABI’s scanner.
Although Illumina intends to begin shipment and revenue recognition on the
proprietary genotyping system in Q4/02, the timeline is tight as it can
take up to 2 months to ship the system to a customer, and a firm order has
not yet been placed. However, Illumina is marketing the system
independently and will not need to share profits with a partner. The system
is capable of delivering over 1MM genotypes per day. Illumina has developed
in-house the scanner, lens, and assay technology that ABI contributed to
the collaboration. Illumina plans to target the 20-30 high throughput
genotyping centers, which perform over 1MM genotypes per day. 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 existing customers with service contracts 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’s 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.
Although Illumina has not disclosed immediate plans for the ABI
relationship, management indicated that they would evaluate the
partnership. 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.
4. SURPASSED GOAL OF 10 GENOTYPING SERVICE AGREEMENTS IN 2002
In the third quarter, Illumina signed 7 genotyping agreements, bringing the
total number to 18, including a large-scale SNP genotyping project with the
National Institutes of Health (NIH). The NIH will pay Illumina $9MM to work
with a global consortium to create a detailed map of genetic variation, the
International HapMap Project, to better understand the genetic variations
that predispose individuals to common diseases. Illumina also signed
agreements with the Wellcome Trust Sanger Institute, the University of
Cambridge, GlaxoSmithKline, and Novartis.
Illumina’s 2002 milestones are as follows:
*- Launch a proprietary commercial product
- Add a second 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
* Completed |
