Six Reasons Why Illumina Has Nothing to Fear from Thermo/Life

4/29/13Follow @xconomy

Illumina doesn’t need luck. But the San Diego-based company just caught a break this month, which will make it easier to continue crushing all who dare challenge its supremacy in genomics.

The gift I’m referring to was the mega-merger a couple weeks ago between Waltham, MA-based Thermo Fisher Scientific (NYSE: TMO) and Carlsbad, CA-based Life Technologies (NASDAQ: LIFE). This deal, worth $13.6 billion, was heralded by the companies as a move to create “an unrivaled industry leader” that supplies biomedical research labs. Taken together, Thermo and Life Tech sell everything from mass spectrometers to chemical reagents to high-speed DNA sequencers that labs rely on every day. This is a huge mash-up of people and cultures and geographies, as Thermo has 39,000 employees and Life Tech has 10,000 people spread around the world.

I’m sure there are some rational, economically self-interested reasons behind this mega-deal. Harried executives see golden parachutes. Bankers and lawyers want to get paid for their sage advice. Shareholders see tax benefits, higher profit margins, and higher stock prices.

But when two really big companies collide like this, the story no one talks about is that internal confusion, uncertainty, and turf-battling will ensue for months or years. People get new bosses, and the new bosses try to figure out who’s who and what’s what in the new operation. The new bosses ultimately set new priorities. Committees reign. Office politics get rough. People aren’t motivated to do their best, most innovative work.

It all adds up to bad news for Life Technologies’ autonomous Ion Torrent Systems unit, the No. 2 player in the high-speed DNA sequencing industry. And bad news for Ion Torrent is good news for Illumina (NASDAQ: ILMN), the unrivaled No. 1 in this fast-emerging and important market.

Here are a few reasons why this deal is such a boon for Illumina.

Illumina already has Ion Torrent/Life Tech on the ropes. Even with the “sequestration” crimping the budgets of academic researchers who buy lots of Illumina products, the company smashed Wall Street’s first-quarter sales expectations, seeing $331 million in revenue, a 21 percent bump. The company makes its money selling machines to researchers, selling the chemicals to run experiments, selling its own genomic diagnostic tests based on its DNA sequencing machine, and selling machines for other companies trying to ride the genomic diagnostics wave.

Ion Torrent had to look at that first quarter earnings report with envy. It hasn’t had news that good in a long time. Ion Torrent burst on the scene in December 2010, when it started selling a first-of-its-kind DNA sequencing machine that uses semiconductor-based technology to determine the sequence of DNA base units in a sample. This was supposed to be a grand move toward democratization of DNA sequencing, as it meant these tools could benefit from Moore’s Law-style improvements. The original Ion Torrent machine was cheap (original sticker price of about $50,000), small enough to fit on a lab bench, and fast. Little labs that couldn’t afford the existing Lexus on the market (Illumina’s HiSeq machine) could think seriously about buying a Toyota.

Things looked good for a while for Ion Torrent. But Illumina responded fast with its own lower-cost, benchtop instrument called MiSeq. And while Ion Torrent appears to have the edge in market share among desktop sequencers (about 60 percent share, according to JP Morgan analyst Tycho Peterson’s analysis in February), Illumina is making more money because people use its machines more, and buy more of the consumable chemicals needed. Peterson, in an April 22 note to clients, said that Illumina is winning on more than 80 percent of the competitive customer orders. That competitive dominance is continuing even after Ion Torrent released a higher-end Ion Proton machine last year.

Daniel MacArthur, a researcher at Massachusetts General Hospital, told me earlier this month that while his institution has access to all the various genomics machines, Illumina’s tools are the workhorses that get the most use.

“I know a lot of small labs that bought an Ion Torrent machine and then it sat dusty on the bench for a year or 18 months,” MacArthur says. “People bought these things because they were cheap. At the time [2010 and 2011], there was a lot of stimulus funding available. They wanted to get involved in next-gen sequencing because it was the next big thing, but then they realized it still costs a lot of money to run each experiment. And they had no idea what to do with the data. Ion Torrent doesn’t generate a lot of data, but by a small lab standard, it’s overwhelming.”

Illumina has the more focused management team. If you’ve ever met Illumina CEO Jay Flatley or heard him on a conference call, you know this is an exceptionally focused, intense, disciplined individual. He has other smart, aggressive people working for him.

Jay Flatley, CEO of Illumina

Ion Torrent’s leader, entrepreneur Jonathan Rothberg, is certainly a smart, focused and driven guy, too. He has a gift for gab and promotion. He once told me he couldn’t answer a basic business question because “this is like 1948 and we’re the Israelis” to drive home a point about how intensely competitive his industry is.

But in a merged entity with 50,000 people, Rothberg is just another guy running a small division who has to fight internal battles for resources. Rothberg sold his last company to Life Tech’s Greg Lucier, but the guy who runs Thermo Fisher is named Marc Casper. And Marc Casper just made a very big transaction to buy all of Life Tech, not just its Ion Torrent division. Casper may have a grand plan to leverage the heck out of Ion Torrent, but I didn’t hear it in his prepared remarks for his company’s first quarter conference call on Apr. 24. Ion Torrent and Rothberg’s name were visibly absent from the press release announcing the Life Tech merger, and Lucier only offered a shaky, hedged answer to investors who inquired about Rothberg’s future at the company.

A few analysts who follow Illumina smell weakness. “We have been bullish on Illumina but see significantly more upside following the strong quarter, especially given the distractions that are naturally going to set in at LIFE (Illumina’s key competitor in gene sequencing) as personnel there adjust to their company being acquired by Thermo Fisher,” said Vamil Divan of Credit Suisse, in an Apr. 22 note to clients.

The top sequencing centers are wedded to Illumina, and Thermo won’t sway them. The Broad Institute, the University of Washington, Washington University in St. Louis and others set the standards for genomics research, and they are wedded to Illumina. They know Menlo Park, CA-based Pacific Biosciences (NASDAQ: PACB) exists, but mostly they marvel at the breathtaking money pit that it has become. While they play with newer technologies in development like those from U.K-based Oxford Nanopore, Mountain View, CA-based Genia Technologies, or Providence, RI-based Nabsys, these are still R&D curiosities at this point, not commercial players.

The larger point, though, is that these big-time scientists are discerning and demanding customers. They like the machines they have from Illumina. They can do a lot of cool stuff with them. And when they publish career-making results in Nature or Science based on experiments done on an Illumina machine, other genomics labs take note.

The clinical genomics movement is catching on, and it depends on Illumina. While the Ion Torrent machine and PacBio instrument have some nice features, accuracy is king when physicians get involved and start using DNA sequencing for diagnostic purposes. Illumina instruments aren’t perfect—no machine is—but it has the best combination of speed, price, and accuracy in its product lineup. It can look at gene expression, gather data on certain regions of the genome (genotyping), or it can sequence the whole shebang, the complete 6 billion-letter genome signature of an individual. Illumina was also shrewd to make sure that its smaller MiSeq instrument could be used to double-check the accuracy of runs done on its high-end HiSeq instrument, which makes it so researchers don’t need to buy a different company’s tool for validation runs.

Just in the past couple weeks, I’ve spoken to a couple of different genomic diagnostic companies on the West Coast—Seattle-based Adaptive Biotechnologies and San Carlos, CA-based Natera. Their business, like many other aspring clinical genomics players, depends on their creative use of Illumina’s HiSeq machine. While Ion Torrent and a couple other machines are OK for research, Illumina is the only platform technology that diagnostic companies can seriously consider at this point.

Illumina has shown a ruthless streak lately, and it will pounce on weakness. I have no way of knowing, but it wouldn’t surprise me if Illumina’s management team is thinking about how to twist the dagger into Ion Torrent now that it has been swallowed up by Thermo Fisher Scientific. Illumina plays to win and isn’t afraid to ruffle feathers along the way. It raised prices last year on diagnostic companies it supplies with reagents. It fights hard over intellectual property in the legal arena. It tried to block the BGI/Complete Genomics sale by offering Complete’s shareholders a higher bid, and when that didn’t work, it tried to derail the deal by appealing to the U.S. government that some special genomic sauce shouldn’t be given away to China. It would make sense if Illumina pushed hard now to poach some top talent out of Life Technologies, right when many are uncertain about their future with the company.

Remember, Illumina has fought some hard battles and won. It fended off a hostile takeover from Roche just one year ago, when the Switzerland-based company offered $44.50 a share, which I argued was an insulting low-ball offer. Illumina stock closed Friday at $62.61. Looking at that stock price has to remind Illumina management every day that they were rewarded for their toughness.

Illumina has been building an Apple-style “walled garden” that’s attractive to join, and painful to leave. No other company, certainly not Ion Torrent or even a version of Ion Torrent with a smart new corporate sugar daddy, can come close to Illumina’s full product lineup. Illumina has a high-end machine (HiSeq), an excellent low-cost alternative (MiSeq), automated sample prep to make the experiments easy, cloud computing service (BaseSpace) to handle the DNA data from the machines, and a growing array of independent software applications you can get through Illumina to interpret/analyze the DNA data.

“You can see Illumina trying to consolidate it into a big vertically integrated system. Like Apple, they basically have control over the whole workflow from beginning to end,” MacArthur says. While Illumina has made some awesome tools that are driving biological innovation, that sort of market power in such an important field worries me a bit. But that’s another column for another day.

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  • http://www.facebook.com/rgayle Richard Gayle

    NIce article, Luke. I wonder though what sort of effect this will actually have on the consumer. I notice that the cost of sequencing a megabase of DNA has flattened out in the last few years. Check genome.gov/sequencingcosts/. Are we at the point where cutthroat behavior and M&A drive the industry more than innovations? Is this causing the cost curve to flatten?

  • Peter Brown

    This article actually lacks two important facts:
    1) ILMN lost BGI as one of its largest customer and ILMN should actually starts worrying about BGI + GNOM as a new and strong competitor.
    2) ILMN actually has a net loss of $ .18 per share for the first quarter from legal contingencies.

  • http://www.xconomy.com/ Luke Timmerman

    Richard—I think the chart you refer to is about right, prices appear to be flattening in genomics. We don’t really have the $1,000 genome yet, much less the $100 genome. I think it will take fierce competition, in technology and in the marketplace, to get prices down there.

    Peter—I don’t think Illumina has much to worry about BGI/Complete, at least until they start selling instruments. The service model won’t pose much of a threat, in my opinion. And Illumina is finding plenty of new customers, in the form of molecular Dx companies.

    • NGM

      With the big gap there is between Complete “hairy balls” PCR-based service and encapsulating/scaling it into a sequencer, solving sample prep to be faster and more accurate and cheaper than real time based technologies, let’s not even go into manufacturing equipment according to FDA standards, but even finding a manufacturer able to do it Research Only, I don’t see it happening (in time). And then these are not plug and play instruments, it takes years to tweak and get it right Hiseq needs constant massage to work, you need to get it right, really right before you go to market, look at SOLID… The easiest route for them is keep on expanding their service side. BGI used to be the cheapest even when on Ilmn, imagine now… That’s going to be their edge: price, not instruments.

  • http://www.biotechduediligence.com/ Andrew Goodwin

    Agree, BGI/GNOM is not a threat. They are just the most recent example of how merger mania completely run amok with business operations. Not to mention they STILL haven’t received CLIA designation, unless someone has recent info to the contrary. Luke you failed to mention that ILMN’s first tactic against GNOM was to try to sue them out of existence and when that didn’t work they originally make a take-UNDER bid during the auction process.

  • Ion Torrent

    I
    hope Illumina pays you well – Goebbels would have been proud…

  • Jan Z.

    Dear Luke.. Sorry to say, but this article has some interesting points, but is really mostly a big pile of rubbish glorifying Illumina. You for sure need to be updated on whats going on in the marked, and I hope your readers can see through that, and for sure will have face-to-face meetings with reps from other vendors like Life Tech or Pac-Bio as well, before buying in to the previous generation of NGS technology. This represents a big part of the marked, and are still growing, but it is the previous generation, and the marked is changing whether we like it or not, and there is a limit to how many limitations and compensations, not to mention time and budget, end users will live with, loyal or not, when superior alternatives are already available and developing at a unprecedented speed..!!!

  • Rob

    It’s articles like these that pollute the internet, filling it with nonsense information. When I’m trying to find some decent information about the technology I don’t want to come across this bullshit. Mr, go do something that make sense.