gs: ILMN(IL/N): Q4 better by 1c. 2006 guidance
above expectation. Raised 2006-07 est.
Introduced 2008 EPS
2-1-06
52-Week Range US$21-7
YTD Price Change 51.99%
Market Cap US$957.5mn
Illumina reported Q4 EPS of $0.01, $0.01 & $0.02 better than our est & cons, resp., partly
due to a milestone payment from Invitrogen. ILMN?s 2006 guidance was better than
expected. In Q4/05, ILMN (1) signed 6 agreements for large scale genotyping studies (2)
launched a 300K SNP whole genome genotyping chip, (3) shipped 24 genotyping systems
(worldwide installed base of 126) & (4) launched a tube-based oligo product w/ IVGN.
The company also plans to triple manufacturing capacity by 4/06. We raised our 2006 EPS
(ex-ESO) by $0.10 to $0.20 & 2007 EPS by $0.27 to $0.43. We are introducing our 2008
EPS (ex-ESO) of $0.64. Our 2006-08 EPS (inc. ESO) are ($0.01), $0.23 & $0.45. We
continue to rate ILMN In-Line based on broad technologies, rapid sales growth, &
increasing competitiveness in the genotyping/expression markets. Risks are weaker sales
and patent disputes. Our coverage view is Neutral.
1. MILESTONES:
- Triple manufacturing capacity (4/06)
- Launch rat whole genome expression chip (H1/06)
- Launch 500K SNP Sentrix Beadchip (mid-06)
- Launch 1MM SNP Sentrix microarray based on two Sentrix Beadchips(Q2/06)
2. RAISED 2006-07 ESTIMATES. INTRODUCED 2008 EPS.
For 2006, we increased our revenues by $12M to $120MM (+63% y/y) based on increased sale of
instruments, consumables as well as genotyping service revenues. We reduced our gross margin by
50bps to 69.5% due to capacity expansion costs. Research and development expenses as a
percentage of revenues were decreased by 642bps to 27.9% to reflect greater operating leverage.
We also increased our tax rate by about 61bps to 4.61% primarily related to increased sales outside
of the U.S ( The U.S. tax rate will remain negligible as Illumina has about $100MM of NOLs). The
net impact to our 2006 EPS was a $0.10 increase to $0.20.
For 2007, we increased revenues by $21M to $158MM (+32% y/y). Our gross margin was reduced
by 50bps to 69.5% while research and development expenses as a percentage of revenues decreased
by 892bps to 24.04%, leading to an increase in our operating margin by 810bps to 6.63%. We also
increased our tax rate by about 367bps to 7.67% due to increased sales. Consequently, Our 2007
EPS was raised by $0.26 to $0.43 (+115%).
We are introducing our 2008 EPS (ex-ESO) of $0.64 (+48% y/y). Including ESO expenses, our
2006-08 EPS estimates are ($0.01), $0.23 and $0.45, respectively
3. STEADY PROGRESS TO EXPAND FRANCHISE
a. Instruments
In Q4/05, Illumina shipped 24 beadstations (of which 6 were leased), up from 19 in Q3/05, 18 in
Q2/05 and 13 in Q1/05. The Q4 shipments bring the total installed instrument (including Beadlabs)
base up to 126. There was no sale of Beadlabs in Q4/05.
The high throughput Beadlab stations cost about $1-2MM while the medium throughput
Beadstations cost about $250K. Management estimates the market opportunity is about 30-40
Beadlabs worldwide. Beadlabs and Beadstations generate about $1-3MM and $50-400K in
consumables sales per year, respectively.
b. Genotyping microarrays
During Q4/05, Illumina signed agreements for large scale genotyping studies with Genizon
Biosciences, The Center for Inherited Disease Research (CIDR), The NIDDK (an NIH institute), all
of which will use the 300K SNP (Single Nucleotide Polymorphisms) HumanHap Beadchip
launched in early 2006. Illumina also signed a genotyping agreement with PharmacoDesign using its
100K SNP Human Beadchip which was launched in Q2/05. In addition, Illumina signed two
genotyping service agreements with Cancer Research-UK and Aviagen.
The 300K SNP HumanHap Beadchip and the 100K SNP Human Beadchip, part of the company's
collection of whole genome genotyping products, can analyze over 317,000 and 100,000 SNPs per
sample, respectively. Illumina's pricing of $1,000 per sample ($600-700 for large volume
agreements) is in-line with Affymetrix's products. Management noted that the pricing environment
has been competitive. Illumina expects to launch a 500K SNP Sentrix Beadchip in mid-2006. The
company also plans to launch a 1MM SNP microarray product based on two Sentrix Beadchips by
Q2/06.
Management expects the market size for SNP genotyping, a growth driver for the company, to grow
to $1B in 2010 from $200-300MM in 2005, which represents a CAGR of 30-40%.
c. Gene expression microarrays
Illumina slightly delayed the launch of its rat whole genome expression Beadchip to H1/06 from
Q4/05, due to a manufacturing step (i.e. beadpool production) which did not meet the company's
quality standards. The delay for the rat gene expression product will not affect the production of the
mouse and human gene expression beadchips.
In Q3/05, Illumina launched two Sentrix Mouse Beadchips which allow whole genome expression
profiling of multiples samples on one chip. The introduction of the mouse products followed the
initial launch in Q1/05 of the Sentrix BeadChips for whole-genome expression profiling of human
samples. Management indicated that human, mouse and rat gene expression products cover over
90% of the gene expression market.
The Sentrix BeadChips which can be used for humans, mice and rat samples should reduce the cost
of genome-wide expression analysis, with pricing as low as $100/sample. One chip has the capacity
to analyze six discrete whole genome samples at once against 46-48K genes. The other chip can
compare up to 8 samples in parallel against 23-24K genes, sequenced in a third party database, the
RefSeq database, which is widely used in genetic analysis.
Management expects the market size for gene expression to grow at about 15% per year from about
$0.8-1.0B in 2005. Affymetrix has about 30-40% market share. Home brew methods are still used
by 50% of the market.
4. MANUFACTURING CAPACITY TO TRIPLE BY APRIL 2006
Illumina plans to triple manufacturing capacity by April 2006 in order to meet demand in 2006. The
expansion will cost about $5MM. The company's manufacturing facilities are running at close to
full capacity (24 hours per day/ 7 days a week). One of the key factors affecting capacity is the
number of bead array decoders, which are used as a last step in the manufacturing process. Illumina
plans to increase the number of decoders from 12 in Q2/05 to about 36 in Q2/06. Each decoder
costs about $100,000. Management also noted that they could double the capacity, if needed, to 72
decoders by the end of 2006.
5. LAUNCH OF TUBE BASED OLIGONUCLEOTIDES WITH INVITROGEN
In Q4/05, Illumina and Invitrogen launched tube-based oligonucleotides as part of their
collaboration. In Q3/05, the companies started selling plate-based oligonucleotides. Tube- based
oligonucleotides have higher margins compared to plate-based oligonucleotides.
In December 2004, Illumina entered into a collaboration with Invitrogen which will use its 350
salespeople to market and distribute Illumina's Oligator (oligonucleotide) DNA synthesis
technology. Illumina will be responsible for manufacturing of plate-based and tube-based
oligonucleotides. The collaboration with Invitrogen should expand Illumina's Oligator synthesis
technology into the tube-based oligonucleotide market, which is 4 times larger than the plate-based
market that Illumina currently serves. Management expects the collaboration to yield annual sales of
$100M within the next few years. Profits will be shared equally.
I, Maykin Ho, Ph.D., hereby certify that all of the views expressed in this report accurately reflect... |
