GS Update:
ILMN reported a Q4 loss of $0.24/share excluding a litigation judgment- related interest
expense of $0.19MM. The loss was $0.03 better than our est. due to lower R&D
expenses. We maintain our 2003 loss est. per share of $1.02 and introduce our 2004 loss
est per share of $0.59. In January, ILMN sold to Genome Quebec its first production scale
genotyping system, which should be installed at Genome Quebec in early 2003. Legal
proceedings between ILMN and Applied Biosystems (ABI) continue regarding their 1999
Joint Development Agreement on the large-scale genotyping system. We maintain our
In-Line rating based on ILMN's unique and broadly applicable technology, and
momentum from launch of the company's proprietary genotyping system. Risks to our
view include weak demand from service customers, slower than expected sales of the
genotyping system, dependence on financial markets and litigation with ABI. Our
coverage view remains Neutral.
RECOMMENDATION: WE CONTINUE TO RATE IN-LINE based on ILMN's unique
and broadly applicable technology, and momentum from launch of the company's
proprietary genotyping system. There is increasing interest in single nucleotide
polymorphism (SNP) analysis among pharmaceutical companies, academic institutions
and government agencies. However, wide adoption is restricted by high cost per data
point and low throughput. Illumina's system is well suited to address these hurdles. ILMN
has confirmed the sale of its first proprietary genotyping system and expects to place 4
additional systems in 2003 for $1-2MM per unit.
1. Q4 LOSS OF $0.24/SHARE, $0.03 BETTER ON LOWER R&D EXPENSES
Revenues of $3.9 million were $0.5MM below our estimate due to negative quarterly fluctuations.
Excluding $0.19MM of interest expense related to a litigation judgment, total expenses of
$11.7MM, were lower than our estimate primarily due to R&D expenses of $6.3MM, which were
$1.4MM lower than our forecasts. 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 in line
with our estimate. The net loss was $7.6 million or $0.24 per share on 31.3 million basic shares.
2. MAINTAIN 2003 LOSS ESTIMATE OF $1.02; INTRODUCE 2004 LOSS ESTIMATE OF
$0.59
We maintain our 2003 loss estimate of $1.02 based on revenues of $24.5MM (+ 144% yr/yr).
Revenues in 2003 include sales from the new genotyping system and accompanying consumables,
as well as continuing sales of oligonucleotides and service agreements. For 2004, we have
introduced our EPS estimate of $0.59 based on revenues of $39.8MM (+ 62% yr/yr). In 2004
revenues should grow through additional placements of genotyping systems and sales of
consumables. Illumina ended 2002 with $66MM in cash, down $27MM from yearend 2001. In
2003, the company expects to spend approximately $25MM in cash.
3. FIRST PROPRIETARY GENOTYPING SYSTEM SOLD
In July 2002, 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. In December, in response to a patent
infringement suit filed by ABI, Illumina notified ABI that ABI was in breach of their 1999 joint
development agreement. The companies will meet in court on February 14 to determine if the
proceedings should be heard in court or by an arbitrator.
Despite previous delays of an instrument developed in collaboration with ABI, Illumina launched
and sold its first proprietary genotyping system to Genome Quebec. The system is expected to be
installed in early 2003, at which time Illumina will recognize the $1-2MM in revenue associated
with the sale of the system. Illumina will initially target the 20-30 high throughput genotyping
centers, which perform over 1MM genotypes per day. The first adopters of the technology are
expected to be other participants in the HAP mapping agreement that Illumina was selected to
participate in by the National Institute of Health (NIH) in September 2002. Illumina expects to
place an additional 4 genotyping systems in 2003. Along with system placement, Illumina will sell
consumables utilized by the system. Assuming that the systems are run for 7-9 hours/day for 250
work days, consumable sales could total $12-12.5MM/system.
Illumina has hired a small sales force (5 people worldwide) that should effectively target these
high-throughput accounts. In 2003, Illumina expects to hire additional sales force in Europe,
additional customer service representatives and establish a subsidiary in Japan to market the
genotyping system. 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. Illumina's genotyping system will also make it easier for commercial
customers to expand into proteomics and gene expression using Illumina's technology. Illumina
expects to launch a proprietary gene expression system in 2003 that is complimentary to the scanner
that is used on its' genotyping system, which will allow users to switch between genotyping and
gene expression experiments.
4. 2003 MILESTONES
- Sign 15 service contracts - Ship 5 additional genotyping systems (one sold to Genome Quebec) -
Develop a minimum of 100,000 assays for the HapMap NIH project - Launch whole genome
oligonucleotide set
- Launch system for gene expression profiling
5. RECENT HIGHLIGHTS
a. In September 2002, the NIH selected Illumina as on of the participants in the International
HapMap project. The NIH will pay Illumina $9MM to work with a global consortium to create a
detailed map of genetic variation to better understand the genetic variations that predispose
individuals to common diseases.
b. Illumina completed an agreement with GlaxoSmithKline (GSK) for assay development for SNP
markers and follow-on genotyping against a sample DNA set from GSK.
c. Illumina signed a commercial agreement with Cold Spring Harbor Laboratory to provide
approximately 100,000 oligonucleotides for a study to determine the mechanism of RNA
interference.
d. Entered agreement for Genome Quebec to purchase a proprietary production scale genotyping
system. |
