Illumina Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2022

There are 15 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the 4th Quarter 2021 Illumina Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would like to now pass the conference over to Sally Schwartz, Vice President of Investor Relations.

Speaker 1

Good afternoon, everyone, and welcome to our earnings call for the Q4 and full year 2021. During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activities, after which we will host a question and answer session. If you have not had a chance To review the earnings release, it can be found in the Investor Relations section of our website at alumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer and Sam Samad, Chief Financial Officer. Francis will provide an update on the state of Illumina's business and Sam will review our financial results, which include GRAIL.

Speaker 1

As a reminder, pending the outcome of the European Commission's investigation into Illumina's acquisition of GRAIL, the Commission has adopted an order requiring Illumina and GRAIL to be held and operated as distinct and separate entities for an interim period. Compliance with the order is monitored by a monitoring trustee. During this period, Illumina and Grail are not Permitted to share confidential business information unless legally required and GRAIL must be run independently, exclusively in the best interest of GRAIL. Commercial interactions between the two companies must be undertaken at arm's length. This call is being recorded and the audio portion will be archived in the Investors section of our website.

Speaker 1

It is our intent that all forward looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward looking statements are based upon current available information and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10 Q and 10 ks.

Speaker 1

With that, I will now turn the call over to Francis.

Speaker 2

Thank you, Sally. Good afternoon, everyone. I'm excited to share with you how our commitment to innovation is driving growth and unlocking the power of the genome. My comments will cover a few key areas, starting with our strong finish and exceptional results for 2021, followed by how our platforms and markets drove those results. I'll then conclude by highlighting a few of the many trends that will support Power momentum and continued growth in 2022 and beyond.

Speaker 2

Let's start with our financial results for both the Q4 and full year 2021. 4th quarter revenue of approximately $1,200,000,000 increased 26% year over year, with strong growth across both instruments and consumables and across all regions. Full year 2021 revenue of more than $4,500,000,000 increased 40% year over year, reflecting 76% growth in sequencing instruments and 43% growth in sequencing consumables. We're seeing record demand for our instruments across the throughput spectrum and across geographies. In 2021, we shipped more than 3,200 sequencing instruments and added more than 9 30 new instrument customers, over 50% more than in 2020 or 2019.

Speaker 2

Delving now into each of our platforms, starting with high throughput. We shipped 384 NovaSeq units in 2021, with more than 1 third of those instruments for oncology testing. Approximately 50% of NovaSeq orders in 2021 or to new to high throughput or new to Illumina customers. 2021 NovaSeq consumable pull through Of more than $1,300,000 per instrument was the highest ever average, even with over double the placements compared to last year. Moving to mid throughput, in 2021, we shipped more than 1100 NextSeq systems, surpassing 1,000 for the first time and nearly doubling 2020 shipments.

Speaker 2

This volume was driven by growing NextSeq 550 demand in clinical applications like oncology testing and reproductive health, as well as NextSeq 1,000 and 2,000 demand as customers expand into multi omic applications. More than 20% of NextSeq 1,000 and 2,000 units This year, we're placed with new to Illumina customers as we continue to see new customers using higher throughput applications. For low throughput, in 2021, we shipped more than 1600 units, another record, driven in part by the addition of more than 700 new customers. Looking at our continued strong growth through the lens of our markets. Our clinical markets currently include testing for oncology, reproductive health and genetic disease.

Speaker 2

In 2021, our consumable shipments to clinical market grew 42%, driven in particular by oncology testing, where many customers are building out comprehensive genomic profiling or CGP and expanding into liquid biopsy and monitoring. We continue to see expanding opportunities for our oncology products globally, including new studies launching in Europe and Asia with our research use only TruSight Oncology 500 assay. For example, our recent joint research project With the National Cancer Center Japan, we'll develop personalized cancer treatment for patients with nasopharyngeal carcinoma, a cancer that occurs more frequently in Asia and our partnership with the Jean Perrin Centre At the Clermont Ferrand University Hospital in France, we'll assess the clinical value of CGP in patients with late stage disease compared to the current standard of care. Also in oncology, GRAIL continues to see strong momentum. GRAYO launched the GALLERY test last year as the 1st clinically validated multi cancer early detection test to be available to patients and providers.

Speaker 2

Galleri can detect more than 50 types of cancer, most of which have no current screening. It's great to see the initial market reception with multiple large employers and payers adopting Galleri and more than 1500 prescribing partners, including participation from leading health systems like the NHS, The Mayo Clinic and the Cleveland Clinic. The team continues to collaborate with pharmaceutical partners like AstraZeneca, Amgen and Bristol Myers Squibb on potential new innovations in the post diagnostic space. Finally, the recent initiatives launched in the U. S.

Speaker 2

And EU to beat cancer are very encouraging. The U. S. Cancer Moonshot National Initiative and Europe's beating cancer plan highlight the increasing recognition of early detection as a critical component in the fight against cancer. Illumina is deeply committed to supporting all early detection, Beyond oncology, Reproductive Health also had a strong year in 2021.

Speaker 2

This was driven in part by revised American College of obstetricians and gynecologists or ACOG guidelines enabling genetic testing coverage for all U. S. Pregnancies as well as increasing adoption of our VeriSeq NIPT V2 product globally. Our 3rd clinical market, genetic disease testing, saw tremendous growth and additional evidence generation in 2021, With significant publications in both the New England Journal of Medicine and JAMA Pediatrics affirming the clinical utility of Whole Genome Sequencing or WGS for critically ill children. In 2022, we're already seeing an increase in coverage with California, Oregon and Maryland Medicaid initiating coverage for WGS in the NICU setting.

Speaker 2

Expansion of programs for WGS in NICU settings are also occurring globally, including our recent project with Germany's Hanover Medical School to implement the use of WGS in NICU patients. This program Contributes to a growing body of evidence from other countries, including the United Kingdom and Australia, as well as in states across the U. S, showing that WGS offers significant benefits for diagnosis of genetic disease in critically ill infants, along with cost efficiencies for health systems. Turning to our research and applied markets, Consumables grew 43% in 2021, driven by projects like All of Us, along with ongoing COVID surveillance efforts that contributed approximately $220,000,000 in total revenue. I'd now like to spend a few minutes on 3 key trends that will drive long term growth.

Speaker 2

1st is the continued deepening and expansion of Illumina's addressable market. We're seeing further penetration of our existing markets through increased access and adoption. The use of sequencing is proliferating globally across applications and new initiatives continue to integrate genomics into national healthcare systems. Our technologies and genomics expertise Our enabling programs like Our Future Health, the U. K.

Speaker 2

Largest ever health research program that will deliver genetic analysis of DNA samples from up to 5,000,000 volunteers. This data will be used for a variety of potential discoveries, including new signals to detect diseases earlier, new ways to better predict high risk population for diseases and new personalized therapies or tools to delay diseases or change the course of their progression. We're excited to play a role in this project as the genotyping partner for the program. We also continue to support a growing global COVID surveillance network that will extend to broader pan pathogen and genomic epidemiology work. This infrastructure is already being used to study other infectious diseases.

Speaker 2

For example, in South Africa, Doctor. Tulio D'Oliveira's team at Seri, the Center For Epidemic Response and Innovation, Is using their fleet of sequencers to study other communicable diseases like HIV and malaria. We expect additional opportunities for epidemiology applications in the future as global funding for pathogen surveillance and research expands and new sequencing applications and opportunities are growing and evolving rapidly, including in multiple nascent spaces like multiomics and drug development. We're supporting the spectrum of multiomic applications across our instruments, including Proteomics, where our co development partnership with SomaLogic is off to a strong start. We're also catalyzing growth in drug discovery, where genomic based methods can dramatically improve speed to market, success rates and costs.

Speaker 2

In addition to our partnership with National Biosciences, we're collaborating with the Montreal Neurological Institute Hospital, Takeda and Roche to enable large scale analysis of patient data and identify promising targets for drug development in neurological diseases. Programs like Our Future Health, growing applications and increasing global access will support long term adoption of NGS. The new markets we're opening, like drug discovery, We'll further enable adoption, while also improving data equity and the integration of genomics into healthcare. We're experiencing this increasing demand for genomics as we enter 2022, with our instrument backlog almost twice the size it was entering 2021. A second trend is the multifaceted growth in our customer base.

Speaker 2

Our existing customers are growing their instrument fleet. We're also seeing increasing numbers of customers new to Illumina. As a result, our installed base has grown to more than 20,000 instruments at the end of 2021. A third trend is the demand for even greater data generation. In 2021, an average Illumina high throughput customer generated approximately 4 times more data than in 2017.

Speaker 2

This will continue as customers need more complete genomic information and as NGF becomes standard in clinical settings. These shifts will increase the number of projects, number of samples per project and the depth of sequencing per sample as multiple tests are run per patient and as samples are used for reads across high intensity applications like multiomics. This demand for higher throughput sequencing will in turn continue to drive further growth in our sequencing consumables revenue. For 2021, between our consumables and services, more than 80% of our revenue is recurring in nature. This more predictable and profitable revenue stream provides a tremendous base to invest into the business and drive future growth.

Speaker 2

Luminess 2021 performance and significant momentum entering 2022 Demonstrate our strong position to support our customers and partners as these trends accelerate genomics and healthcare. I'll now turn the call over to Sam to highlight additional details on our results and operations as well as discuss our guidance for 2022. Sam?

Speaker 3

Thanks, Francis. As a reminder, our 4th quarter financial results include the consolidated financial results for Grail. I'll start by reviewing our consolidated financial results followed by segment results for Core Illumina and GRAIL and conclude with our outlook for 2022. I will be highlighting non GAAP results, which include stock based compensation. I encourage you to review the GAAP reconciliation of these non GAAP measures, which can be found in today's release and in the supplementary data available on our website.

Speaker 3

Our record 4th quarter revenue again exceeded our expectations due to continued strength in our core business. With consolidated revenue growing 26% year over year to $1,198,000,000 For the Q4, GAAP net income was $112,000,000 or $0.71 per diluted share and non GAAP net income was $117,000,000 or $0.75 per diluted share, which included $0.66 of dilution from GRAIL operating losses and $0.09 of incremental dilution from the 9,800,000 shares issued to fund the Grail acquisition. Our non GAAP tax rate was 15.6%, which decreased 280 basis points year over year, primarily due to a more favorable mix of earnings in jurisdictions with lower statutory tax rates. Our weighted average diluted share count for the quarter was approximately 157,000,000. Moving to segment results, I will start by highlighting the financial results of core alumina.

Speaker 3

Core Illumina revenue grew 25% year over year to $1,193,000,000 driven by another quarter of record shipments for both clinical and research, with notable strength in oncology testing, genetic disease testing and population genomics. Core Illumina sequencing consumables revenue grew 32% year over year to $792,000,000 driven by record NovaSeq consumables shipments, resulting from the significant growth in installed base and strong pull through that again exceeded our guidance range. Sequencing instruments revenue for core Illumina grew 35% year over year to $191,000,000 driven by record NovaSeq shipments due to continued new to high throughput customer adoption and accelerating demand in oncology testing. NextSeq 1,000,two thousand shipments also reached a new high in the quarter and there was strong growth across all mid and low throughput systems year over year. We are entering 2022 with a strong sequencing instrument backlog that is almost double the backlog entering 2021.

Speaker 3

Revenue from COVID-nineteen surveillance again exceeded our expectations, driven by the sustained focus on variant tracking due to the emergence of the omicron variant. During the Q4, COVID-nineteen surveillance contributed approximately $42,000,000 in sequencing consumables revenue and $8,000,000 in incremental instrument revenue. Core Illumina sequencing service and other revenue of $106,000,000 was flat year over year as revenue growth from instrument service contracts and lab services was offset by lower IVD partnership revenue. Moving to regional results for core alumina. Revenue for the Americas region was $619,000,000 growing 25% compared to the prior year period, driven by clinical demand in oncology testing, strength in genetic disease research for pharma and population genomics initiatives like all of us and COVID surveillance testing.

Speaker 3

EMEA delivered revenue of $350,000,000 representing 23% growth year over year, driven by strength in emerging markets, population genomics initiatives and COVID surveillance testing. Greater China revenue was $121,000,000 representing growth of 26% year over year due to continued clinical strength in the region driven by the growing installed base in hospitals. Finally, APJ revenue of $103,000,000 grew 34% year over year, driven by record NovaSeq placements and continued momentum in clinical markets, including genetic disease testing and oncology testing. Moving to the rest of the core Illumina P and L. Core Illumina non GAAP gross margin of 71.6 percent increased 470 basis points year over year due primarily to increased fixed cost leverage on higher volumes.

Speaker 3

Core aluminum non GAAP operating Depends of $580,000,000 were up $141,000,000 year over year due primarily to headcount growth, Increased performance based compensation expenses, higher one time partnership related expenses and increased project And driven by investments we are making in R and D and operations to support the growth and scale of our business. Non GAAP operating expenses for the quarter were higher than expected due to higher variable compensation expense and higher partnership as compared to previous expectations. Core Illumina non GAAP other expense of $8,000,000 was $28,000,000 lower than other income in Q4 2020 due to lower interest income on short term investments liquidated to fund the Grail acquisition as well as interest expense on the term notes issued in Q1 2021. Transitioning to the financial results of FerGrail. Grail revenue of $10,000,000 for the quarter consisted of gallery test fees and MRD Partnership revenue.

Speaker 3

Grail non GAAP operating expenses totaled $131,000,000 for the quarter, which consisted primarily of expenses related to headcount and clinical trials. Moving to consolidated cash flow and balance sheet items. Cash flow from operations was $282,000,000 DSO was 49 days compared to 50 days last quarter driven by revenue linearity. 4th quarter 2021 capital expenditures were $70,000,000 and free cash flow is $212,000,000 We did not repurchase any common stock in the 4th quarter. We ended the quarter with approximately $1,300,000,000 in cash, cash equivalents and short term investments.

Speaker 3

Moving now to 2022 guidance. We expect full year 2022 consolidated revenue to grow 14% to 16% to approximately $5,160,000,000 to $5,250,000,000 We expect full year 2020 core alumina revenue to grow 13% to 15% to approximately $5,110,000,000 to $5,200,000,000 GRAIL expects its revenue to be in the range of $70,000,000 to $90,000,000 for 2022, consisting primarily of gallery test seats. For fiscal 2022, at the midpoint of our revenue guidance range, we expect core Illumina sequencing revenue to grow approximately 15% year over year, driven by accelerating demand in our base business. This includes intercompany sales to GRAIL of approximately $25,000,000 which are eliminated in consolidation. We expect core Illumina sequencing instrument growth of approximately 10 percent year over year, driven by continued strength in NovaSeq and NextSeq placements.

Speaker 3

We expect core Illumina sequencing consumables growth of approximately 18% year over year, driven by our growing instruments installed base and strong utilization by our customers. We expect this strength to span our platform and we are raising our pull through guidance for NovaSeq to a range of $1,200,000 to $1,300,000 per system for 2022. We expect pull through for NextSeq 1,000,000 to $180,000 per system in 2022 and pull through for NextSeq 550 in the range of $100,000 to $150,000 per system. For MiSeq, we expect pull through in the range of $35,000 to $45,000 per system and for MiniSeq, we expect pull through in the range of $20,000 to $25,000 per system. We also expect revenue from COVID surveillance in the range of 130,000,000 $150,000,000 in the range of 15.5% to 16% and core alumina non GAAP operating margin of approximately 28% for 2022.

Speaker 3

We also expect the consolidated non GAAP tax rate of approximately 19%. We expect consolidated non GAAP earnings per diluted share in the range of $4 to $4.20 which includes dilution from GRAIL of $3.75 including GRAIL operating loss dilution of approximately $3.25 and incremental dilution of approximately $0.50 from the 9,800,000 shares issued to fund the GRAIL acquisition, in line with previous expectations. And finally, we expect diluted shares outstanding for fiscal 2022 to be approximately 159,000,000 shares. For the Q1 of 2022 for consolidated alumina, We expect revenue to increase 10% to 12% year over year from the Q1 of 2021. This represents a sequential increase from the Q4 of 2021, reflecting a strong start to the year.

Speaker 3

We expect non GAAP operating margin to increase approximately 300 basis points sequentially, primarily due to a decrease in operating expenses. We expect non GAAP tax rate to be in line with our full year 2022 guidance of approximately 19%. We expect diluted shares outstanding to be in line with our full year 2022 guidance of approximately 159,000,000 shares. For For CORE alumina, we expect non GAAP operating margin in Q1 to be in line with our full year 2022 guidance of approximately 28%. I'll now hand the call back over to Francis for his final remarks.

Speaker 2

Thanks, Sam. To close, I'd like to thank our teams, our network of partners and the extraordinary scientists and clinicians we serve. I am incredibly excited for the many opportunities ahead. Today, more than 1,000,000,000 people are covered for genomic testing globally, and we expect this number to double within 5 years as Genomics accelerates the adoption and potential of personalized medicine. Illumina will continue to support the growing number of patients around the world accessing the life saving benefits of genomics from oncology therapy selection to reproductive health, genetic disease testing and pathogen surveillance.

Speaker 2

We will also continue to push genomics to new frontiers like drug development and proteomics. Additionally, we will enable discovery across these existing and new markets with a pipeline of innovative products and solutions developed in collaboration with our customers. It has been fantastic to see the strong interest and excitement across our customer base for our latest developments, including our Breakthrough Chemistry X and our Infinity Long Read technology. We expect to not only directly address unmet market needs, but also revolutionize what scientists and clinicians can expect from sequencing. Together, we're enabling genomic based discoveries that can transform healthcare and ultimately provide a brighter future for human health.

Speaker 2

I'll now invite the operator to open for Q and A. Operator?

Operator

Absolutely. And if you are on a speakerphone, please remember to disconnect your handset excuse me, please remember to disconnect and use your handset. As a reminder, please limit yourself to one question so that we can accommodate as many analysts as possible. You are welcome to reenter the queue if you have additional questions. Our first question goes to Dan Brennan with Cowen.

Operator

Dan, your line is open. You can go ahead.

Speaker 4

Great. Thanks for the questions. Congrats obviously on the quarter. So I wanted to ask a question on the new products. Obviously, we're going to hear a lot more about this this fall.

Speaker 4

But as you would expect, there's material interest in Chemistry X and Infinity, particularly in light of some of the expected competitive launches that will be coming between now and around ATBT. So I'm just wondering, you've laid out some basic metrics on read length, accuracy and speed, and you talked about revolutionizing things and unmet need. So I was hoping, Francis, That you could provide a little bit more color about maybe how we can think about these products. Obviously, you're not going to give us new fashions at this point, but particularly around some of the unmet needs that might be addressed and or this idea of revolutionizing things because arguably Illumina has done a terrific job evolving their product portfolio, driving higher throughput, lower prices, but revolutionary sounds like a pretty big word for this product. So just wondering and hoping to try to get some more color.

Speaker 3

Thank you.

Speaker 2

Yes. Thanks, Dan. And it has been fantastic, as I said, to see the reaction of our customers to both Chemistry X and the data we've provided so far on Infinity. So let me go through each of them a little bit. With Chemistry X, we've been keeping all of you in the loop over the years as we moved from the research phase then into product development and shared some of the early data maybe just over a year ago.

Speaker 2

And then as I said a couple of weeks ago, We're now moving Chemistry X from product development into manufacturing with a whole new manufacturing facility and sort of scaling up production. And so It's been terrific to see the progress and the innovations that are in Chemistry X. As I said, this is a From the ground up, we think of our chemistry, probably the single biggest advance in our chemistry since Silexo was created all those years ago. What this means for our customers and in terms of the industry is we can expect a step change in terms of The speed of the chemistry and that will translate into much faster turnaround times for the tests that our customers are running and that's especially relevant for not just very large scale research projects, but especially relevant in clinical settings, where you do want to get some of those results to patients more quickly. It means higher accuracy and all of that combines to also enable A really exciting roadmap in terms of price per g.

Speaker 2

And we've talked about the fact that we continue to be committed to really Driving down the cost of sequencing to make it more accessible and Chemistry X is a fundamental part of that. And so we're now entering And we're closer to bringing that out into products than we've ever been. I've talked about the fact that this is going to be foundational to all new products coming out. And there's no reason as we look at our existing portfolio why it may not make sense in some parts of our portfolio to have it in there as well. In terms of Infinity, the excitement there is because we've sort of rethought how people think about long reads and short reads.

Speaker 2

And again, went back to first principles to say, what customers don't want is they don't want 2 different platforms, one for short read and one for long read. And what they're telling us is they want to take some of the best elements of what we've got in SBS, high accuracy, low cost, low input requirements and apply that to all REITs. And so when we looked at how we would rethink long REITs, we brought some of the best Those elements and to say low input requirements, lower cost, maintain high accuracy, and they also want it to be a single molecule approach. They didn't want it to be a composite of multiple molecules. And so the team has done a fantastic job innovating to deliver that in terms of our Infinity technology.

Speaker 2

You've seen some data from some of our customers. We've talked about the fact that we're bringing it to market later this year and you continue to see more data and more information from us.

Operator

Our next question goes to Tycho Peterson with JPMorgan, Tycho, your line is open. You can go ahead.

Speaker 4

Hey, thanks. On guidance, 10% sequencing instrument growth, I'm just wondering if a little bit more color around that. Obviously, you've got the NovaSeq Dx launch. How material do you think that could be? And then, Francis, your comments a minute ago, how do you avoid freezing the market ahead of chemistry ex being rolled out?

Speaker 4

And then a follow-up on GRAIL guidance $70,000,000 $90,000,000 is a big step up from $10,000,000 in the Q4. So can you just talk a little bit about scale up plans and how you plan to get there?

Speaker 3

Yes. So maybe I can start, Tycho. This is Sam. Thanks for the questions about the guidance on instruments. And I'll just provide a couple of brief comments.

Speaker 3

I mean, first of all, let me say Instruments in 2021 represented incredible performance. We're entering the year now in 2022 with a record backlog of instruments. So it gives us a lot of confidence about the guide, the 10%. As we think about some of the drivers behind this, Continued very strong placements of NovaSeq, continued very strong placements on the mid throughput side with NextSeq 2000, 1 1000 and we've talked about in 2021 the record performance across those two platforms. Now there is a headwind, which is COVID surveillance.

Speaker 3

We placed quite a few instruments for COVID surveillance in 2021 and we don't expect frankly to place instruments for COVID surveillance in 2022. So that's a year over year headwind that's factored into the 10% growth in terms of the guide. For NovaSeq Dx, that's a product that we're very excited to launch. It will be launched later this year. It does not represent the material impact in terms of growth for instruments in 2022.

Speaker 3

So, Francis, maybe Yes.

Speaker 2

So let's talk about Chemistry And what that means in terms of our customers and how do we avoid, as you said, freezing the market potentially. One of the exciting things we hear from our customers about being with the Lumina Is that you are part of this exciting roadmap and that you're not only getting access to what we provide today, but you know that we are going to continue to innovate and bring new products out. And so for our customers, it's been exciting to watch this journey of Chemistry X Develop and we've been, I think, good about sharing the data through this whole process. So they know what's coming. They can get a sense for what it can mean for them.

Speaker 2

We don't have a new product announced, so there's nothing to freeze the market for. And our customers also know that they've Done this with us several times that whenever we introduce a new product, we do have programs in place that involve trade ins or if you've already placed an order and It's in our backlog. You can switch that if you want to the new instrument. And so over the years, we've developed a number of pretty robust programs around enabling a seamless upgrade for our customers. Now also, the other thing we've learned is, especially in the clinical markets, that when a new instrument comes out, typically Some of our customers will buy one of the new instruments, for example, and use that to develop their new workflows to get familiar with the new instruments and then plan an upgrade over a multiyear period.

Speaker 2

And so that could still play out that as we introduce a new instrument in the future, they may Buy one to sort of get comfortable with it and then use that to plan and upgrade over a multiyear period. Great. And then the in terms of GRAIL, the momentum we're seeing with GRAIL has been terrific to watch. They are seeing traction, As we said with employers and what's been interesting there is we expected traction with financial services companies, with tech companies, Some of the companies that traditionally are more forward leaning in terms of using benefits as a way to attract talent. What we are really excited about is that we're seeing customers across industries.

Speaker 2

We've seen, as we said, Large logistics players and transport players that are signed up to offer this benefit to their employees. And so That's been exciting to see. We're also really pleased with the number of prescribing providers that have now got experience with the Galleri test. So we said there are over 1500 prescribing providers that ordered the test in 2021 last year going into this year. And so that's a great base of healthcare professionals that have some experience now with Galleri and should be more comfortable order it going forward.

Speaker 2

In terms of the guidance, most of the guide for GRAIL this year is GRAIL. There is a component of it associated with at MRD, but it is a smaller percentage. Now as we look at that number, that could be a potential area for upside and we'll keep watching

Operator

Our next question goes to Dan Arias with Stifel. Dan, your line is open. You can go ahead.

Speaker 5

Good afternoon, guys. Thanks. Francis, just back on Chemistry X, is there anything you can add there on the per gigabase economics that might be at play? How much cheaper do you think genome price it could be for the NovaSeq crowd? And then for the mid and lower throughput users, should those folks also see A cost of sequencing decrease if they're running in NextSeq or MiSeq?

Speaker 5

And then if I could just sneak in a second one. On the Nashville Biosciences Collaboration, what's the timeline for the 250,000 samples that I think you're sequencing there? And is that all whole genome? Thanks.

Speaker 2

Yes. Let me start with Chemistry X and what it could mean. We know just apples to apples, Chemistry 1 versus Chemistry X That you will get significant cost reductions. Yes. Now, ultimately, That looks like depends on everything else you think, which is so ultimately, Pfizer So we have to look at optics, optics doesn't the data pass all the testing.

Speaker 2

It's a little early to say the specific impact. It depends on the entire So the stage is specific about what's on when that give you The price but we'll be very confident that a giant part

Speaker 3

is cost reduction with chemists

Speaker 2

I just have specific additional details on

Operator

Francis, you were cutting in and out a little bit there. I don't know if you want to try to Fix that or if you want to try to restate your answer there or anything like that.

Speaker 2

Yes. Let Just a summary I'll say on Chemistry X is, it gives us a big step forward in terms of delivering price reductions in terms of sequencing for our customers. But ultimately, the specific number will depend on the type of instrument we build it into as well as the other components of the technology ecosystem that we build into that instrument, the data pads, the optics and so on. And so stay tuned as we get more specific, we'll share that with you.

Operator

Okay, great. That sounded much better. Our next question goes to Vijay Kumar with Evercore. Vijay, your line is open. You can go ahead.

Speaker 6

Hey, guys. Congrats on the print. And I had a question on the guidance here. Sam, Your Q1 revenue guidance up sequentially. I guess we haven't seen that historically.

Speaker 6

And your guidance implies sequential ramp up throughout the year. I guess, maybe just talk about the visibility you have. I know you made some comments around backlog being Price is high. So talk about the visibility into the guide and now, Francis, I think on the 70% to 90% for Grel, Is that the gross contribution? Is there some intercompany elimination in that number?

Speaker 6

Or is that a net number? Is that a proxy for gallery volumes? Thank you.

Speaker 3

Yes. Thanks, Vijay. So let me actually take both questions. So I'll take the first one on the guide. The visibility on the guide is good.

Speaker 3

I think we have a balanced guide and we're very confident about achieving the guide that we have. With regards to Q1, You are correct. We are entering the year with very strong momentum in Q1. I mean, the business is really We're seeing very strong momentum on clinical with oncology testing, in genetic disease testing and NIPT and our research markets are also robust. We have a very strong backlog, as we said, a record backlog, in fact, in terms of instruments.

Speaker 3

So that's what's driving the Q1 momentum. As we look forward towards the year, this is a year that Reflects a more, I would say, linearity that's more similar to prior to the pandemic, where we see a ramp or an increase in terms of sequential revenues throughout the year. There are a few things that we've considered in the guide that have been reflected in that 14% to 16%, Vijay, that We have factored in that we believe also derisks the guide. So let me mention a couple of those, for instance. One is with regards to COVID surveillance, as I mentioned in the prepared remarks, we're assuming $130,000,000 to $150,000,000 in terms of COVID surveillance revenues.

Speaker 3

That's a step down from last year. It's at the midpoint approximately $80,000,000 of the step down. We've also reflected a step down in terms of population genomics Driven by the termination of the U. K. Biobank, the finishing and the wrap up of the U.

Speaker 3

K. Biobank. So that's a step down in terms of population genomics revenues year over year. And NovaSeq is showing very, very strong pull through. As we said in 2021, we $1,300,000 per instrument and we're reflecting a pull through guidance range of $1,200,000 to $1,300,000 to make sure that we factor in the significant instruments that are coming into the installed base that will take some time to ramp up to those levels of pull through that we're seeing across that we saw across the average in 2021.

Speaker 3

So in general, very confident about the guide, good visibility And but the backdrop to all of this is still a pandemic year, here in year 3 and the uncertainty that goes with that. With regards to GRAIL, the $70,000,000 to $90,000,000 that's end GRAIL sales to their customers. So we do have intercompany elimination of revenues that In fact, our total consolidated alumina revenues, but the $70,000,000 to $90,000,000 is the total and GRAIL sales to their customers. That's not impacted by intercompany. The sales from us to Grail show up on the core business and then they're eliminated in the total consolidated view.

Operator

Our next question goes to Derik De Bruin with Bank of America. Derik, your line is open. You can go ahead.

Speaker 7

Hi, good afternoon. Thank you for taking my question. So, two related questions. 1, on the new platform you're alluding to, Are you going to take a HiSeq X approach and basically segment this and make it for like whole human genome or single cell applications? Where Are you going to make it broadly accessible?

Speaker 7

And then a follow on that is, I can certainly see, elasticity of demand in the research markets. I mean that clearly has been proven out. But what are your assumptions for the clinical market as you lower price? What are your sort of like volume assumptions? I mean, don't you have to keep clinical pricing sort of at a premium for a while longer before you can really sort of see the volumes in there to make it up.

Speaker 2

Thanks. Great. Thanks, Derek. So, let's take both. This new chemistry can be applied across the throughput spectrum.

Speaker 2

So all options at this point are on the table. There are options like you said, where we could create an instrument that targets and catalyzes a segment of the market. So as you're alluding HiSeq X was extraordinarily successful in opening up the whole genome sequencing market that before HiSeq X enabled the $1,000 price point, Very small part of the market was whole genomes. And after HiSeq X, you've seen just an explosion in terms of the number of customers that could do whole genome sequencing and that did in fact do whole genome sequencing. And so one of the options in the table that chemistry X would allow us to do is again look For opportunities like that to catalyze certain segments of the market.

Speaker 2

I mean, you could imagine lots of parts of the markets that could be catalyzed. So for example, Hypothetically, you could look at the single cell market. And we hear from lots and lots of customers that they would love, love to be able to do much, much, much larger experiments using single cells. And so something like Chemistry X could enable that part of the market. We also hear from our customers that they would love to run much, much larger experiments, targeting understanding the genomic drivers of neurological conditions like autism and Alzheimer's and Parkinson's.

Speaker 2

And so you can imagine that this could enable some of those kinds of experiments. In the and so again, depends on where we decide to use this chemistry, but the benefits it provides in terms of lower cost, But also faster turnaround time because one of the other things you could get with this chemistry is you could see scenarios where you can have certain tests Being returned to customers within a single shift and that would be fundamentally enabling to some clinical applications. So even if you The price was the same. Just the ability to turn results around in a single 8 hour shift would open up potentially some segments of the market. From our customer in terms of the price perspective, there are some parts of the clinical market where because we provide end to end solutions, we're already at the stage where The customers buy the product and it's priced in terms of a per report or a per sample fee.

Speaker 2

And those markets Like NIPT, for example, or genetic disease diagnosis are already enabled at the price point they are. And so It's not necessary that the per sample price needs to change because reimbursement is already in place allowing our lab customers to have a profitable business in those areas. But there are other clinical markets where the lower price point will be fundamentally enabling. And So that's sort of how we're thinking about the options in front of us with Chemistry X. Hi, operator, we're ready for the next question.

Speaker 3

Hi, operator.

Speaker 8

Our next question goes to Kyle Meikson of Canaccord. Kyle, your line is connected. You may proceed.

Speaker 9

Great. Thanks for taking the question. Just a 2 part question. So most of these new kind of shortwave platforms Launching in the near term with like low to mid throughput capability, which is suitable for the clinical market like hospitals and clinical research. I'm just wondering if that's going to be an early Focus for you as maybe that will lead into any clinical market share of growth in the near to medium term that Part of the market has kind of under penetrated right now.

Speaker 9

And then the second part of my question I wanted to ask was, I mean, Francis, you mentioned earlier the Biden administration relaunched the Cancer Moonshot Initiative and It references multicancer early detection test, particularly involving studies or trials to accelerate development and market adoption of the MSAT test. So I'd just like to understand your level of confidence that the initiative is going to move the needle for the MSED industry overall. And importantly, Could it improve the domestic or global perception of the merger specifically with Carla obviously and potentially have any downstream impact on the ongoing trials or reviews?

Speaker 4

Thanks.

Speaker 8

One moment while we reconnect our speakers. Kyle, pardon that interruption, but could you repeat your question now that the speakers are connected?

Speaker 9

Sure. Can you hear me?

Speaker 3

We can. We can.

Speaker 9

Perfect. Okay. So The 2 part question, the first of which was most of these kind of competing new short lead platforms that are launching in the near term are low to mid throughput, which is suitable for the clinical market.

Speaker 2

That's going to be

Speaker 9

an early focus for these emerging companies. I'm just wondering if you think that's going to eat into any of your clinical market share or growth in the near to medium term given the area is still pretty underpenetrated. And then the second question I had was about GRAIL. Did the cancer moonshot initiative that the Biden administration, have announced recently Mentions, multi cancer detection tests. I just want to understand if you think the initiative is going to move the needle for the MSED industry overall and could it improve Domestic or the global perception of the merger specifically and potentially have any downstream impact on the ongoing trials reviews?

Speaker 2

All right. So we'll take both. The first question is around entrants in the low to mid throughput market and how we expect that to play out. Let me jump there first. I'll say, obviously, we have terrific products in that part of the market and we just In the last couple of years, we launched the NextSeq 1000, 2000 that are squarely targeted at that space.

Speaker 2

And we think they're especially well suited for the clinical markets because you have the from a cleared perspective, the MySeqDx, the NextSeqDx that are workhorses already in the clinical market. And then you have the terrific price performance that you get out of the NextSeq 1,000, 2,000. Those instruments, NextSeq1000, 2 1000 represent the most powerful mid throughput products on the market, even including some of the entrants that are coming in. And I think that will continue to provide very compelling value to our customers going forward. The other interesting dynamic though that we're seeing playing out in the market is More and more of the new customers coming in are coming in at higher ends of the portfolio than we've seen historically.

Speaker 2

And so what's playing out in the market is that the applications that are emerging for sequencing are more data intensive and sequencing intensive. They are high intensity applications that are just demanding more sequencing and more performance power. And so what that means is I think and we saw this play out In the computer, the PC market, we saw this play out with iPhones that the devices just need to be more and more powerful. In fact, Somebody was telling me that, is NovaSeq the new MiSeq? And I think that's sort of the ethos we're seeing in the market that there is this Insatiable demands for more power and what we consider today, if you're targeting what's the low and mid throughput today, You better show up with a lot of power because today, the future low and mid will look a lot more like today's high throughput market.

Speaker 2

In terms of GRAIL and the cancer moonshot, it's obviously great to have an increased National focus on cancer and bending the mortality curve for cancer. So that's terrific to see. It's especially exciting to see a recognition That early detection of cancer and specifically early detection of multiple cancers simultaneously, the super test Are an important thrust in terms of this fight against cancer. And so just the attention being put on this space, I think it's great to see. We're going to watch to see how that plays out in terms of additional funding or accelerated regulatory review or reimbursement.

Speaker 2

But we feel it's all very helpful in terms of accelerating that market. It's obviously especially helpful for GRAIL because GRAIL is the only product in the market today that can detect 50 cancers and identify tissue of origin. That's obviously really exciting from a Grails perspective.

Speaker 8

Okay. We will proceed in our questions. Our next question is from Sung Ji Nam of BTIG. Sung Ji, your line is connected. Please proceed.

Speaker 10

Hi, thanks for taking the question. Just on the GRAIL multi cancer MRD test that you're expected to launch next year, Was wondering if you might be able to comment on the performance characteristics against some of the single cancer MRD tests They're available on the market today. And then could we expect potential interim data readouts throughout this year?

Speaker 2

Yes. So the ultimate performance characteristics will be announced as the product gets launched, of course. But Given the approach that GRAIL is taking, here are some of the things that we know already and some of the things that you can watch for. One is because it's leveraging the same underlying technology as the Galleri test, this is a test that will be able to detect The recurrence of multiple types of cancer, not just a single cancer. And so that's really helpful because sometimes the cancer that emerges may not be the exact Same cancer as a patient had before.

Speaker 2

And so Grail's approach will be able to detect that. Also, because you're not depending on a Tissue biopsy first to create the test for a patient. You should also be able to get the test into the patient's hands much faster than you would with approach that required a tissue biopsy. So another key metric to watch, which is very, very important for some patients is how quickly A patient can get that test and have it ready for the patient. So the GRAIL approach just Conceptually, it's much faster from that perspective, and so that's another key metric to watch for.

Speaker 2

And then in terms of The performance of the Galleri test in terms of sensitivity and specificity for early detection is really strong. It has an extraordinarily low False positive rate. And since the MRD test is going to be leveraging the same technology, that's something to watch for too, that they're bringing a lot of expertise around delivering this the screening test with high positive predictive value into the MRD market.

Speaker 8

Sung Ji, does this answer your question?

Speaker 10

Yes. Thank you.

Speaker 8

Thank you, Sung Ji. Our next question is from Puneet Souda of SVB Leerink. Puneet, your line is connected. Please proceed.

Speaker 11

Thanks. Hi, Francis and Sam. Thanks for taking the question. I'll just ask 2 in one. First one is, I know you've asked quite a bit about Chemistry X already, but, I just want to clarify that the Benefit of the Chemistry X is equal across all applications from genome to exome to routine RNA seek to single cells.

Speaker 11

Just want to make sure. And then does it get you closer to $100 genome or $100 genome or meaningfully lower versus What a genome price is today? And lastly, if I could just want to clarify on the 10 kilobase reads that you're getting with Infinity, Is that core technology still SBS? That's my understanding. And so at the end of the day, Does this is this on the lower end of the long read sequencing read lengths that are being produced by native long read.

Speaker 11

So this is being viewed as a synthetic. So I just want to make sure we're thinking about that correctly. Thank you.

Speaker 2

Yes. So let me take, Suneet, your question in order. 1st, Chemistry X, is it specific to an application or does it work across all applications? So the answer is it works across all applications. This is a chemistry that is not tied to a specific application.

Speaker 2

So you should You will get the benefits of this chemistry across any application you run on a sequencer that uses this chemistry. It absolutely is a big step forward terms of price reduction. And so depending on the form factor, depending on the instrument we put out, it will be able to deliver Lower cost in that part of the market. And so again, it's one component. As you know, chemistry is one part of it, But it's a part that's going to give us a big step forward, whatever form factor we choose to release this chemistry and whatever instrument type.

Speaker 2

In terms of Infinity, it is SBS and one of the things we've heard loudly from customers Is that they want a single platform that can scale up and down read lengths. What they don't want in their labs is multiple different technologies that have multiple different upfront workflows that requires them to train tech differently that have multiple input DNA requirements. And so Big, big requirement in this market is going to be can you have a single chemistry, a single sort of platform that scales up and down and that's what Infinity delivers. It's on SBS And so it gives you all the things that you already know and are familiar with SBS. And so for our 8,000 customers and our 20,000 20,000 instruments in the field.

Speaker 2

That's really great news. In terms of the 10 kilobytes it's absolutely not as low rank, to be honest. This is exactly where Some of the other long lead players are in the market. Now there are some that can go bigger than that, but that's not where the majority of the market is.

Speaker 12

Got it. Thank you.

Speaker 8

Thank you, Puneet. Our next question is from Tejas Savant of Morgan Stanley. Tejas, your line is connected. Please proceed with your question.

Speaker 13

Hey, guys. Good evening. A 2 parter for you, Francis. Just a Point of clarification first in Chemistry X. I think I heard you mention earlier that you might bring it to some parts of the existing portfolio as well.

Speaker 13

So just to put a finer point on that, does this mean that it could be backwards compatible at least selectively? And then second one on the GRAIL guide here, Is it fair to assume sort of 85,000 tests at the midpoint using that sort of $9.50 list price or Are you assuming a lower, effective ASP in your guidance assumptions?

Speaker 2

Yes. So thank you for that. Let me take the first question. What I've said is we will be using Chemistry X for all new platforms going forward. But to your point, there's no technical reason why selectively We couldn't bring Chemistry X to parts of the current portfolio.

Speaker 2

We don't have plans that we've announced around that at all, but technically speaking, That's it's absolutely backwards compatible for some parts of our portfolio. And then the GRAIL Yes,

Speaker 3

let me take that Frances, so with regards to GRAIL, Tejas, and thanks for the question by the way. No, I would not assume that actually. The price It is, as you said, at approximately $9.50 range, but I would not assume that that price is uniform across that full guide or The total revenue guide, because there could be different pricing assumptions depending on the collaborations, the partnerships that they have. So I would not make that assumption around the test volume.

Speaker 8

Tejas, does this answer your question?

Speaker 3

Yes, I'm good. Thank you.

Speaker 8

Thank you, Tejas. Our next question is from Patrick Donnelly of Citi. Patrick, your line is connected. Please proceed.

Speaker 14

Hey, guys. Thanks for taking the questions. It might be one for you, Sam. Just in terms of The backlog, obviously encouraging to hear it's almost double what it was coming in last year. Can you just talk about how much of that is just a natural organic build as the numbers get bigger versus Any supply chain issues?

Speaker 14

Obviously, that was a big topic. A quarter ago, do you feel like you're mostly past kind of the worst part? And what's the expectations there for the next couple

Speaker 6

of quarters. Have things normalized a bit for you?

Speaker 3

Yes. I think the simple answer, Patrick, and thanks for the question, is really It's organic, Bill. It's the strength of the business. It's the strength in terms of demand that we're seeing in clinical and the applications across clinical and research to some extent. And some of that backlog is instruments, some of it is consumable.

Speaker 3

So it's It reflects the broad base of our business. In terms of supply chain to address your question, I mean, as we talked about last quarter, Obviously, supply chain is more complicated these days with pandemic, with COVID, but we have taken a lot of steps and done a lot of initiatives to help preserve the continuity of the supply chain to make sure our customers have uninterrupted access to product. So we have not seen really disruptions in supply chain given some of these actions, aside from very isolated cases that we see Traditionally, but nothing unusual in terms of disruptions to supply chain. We've made sure that we've increased the amount of Distribution center capacity that we have, we've increased safety stock on consumables. We've taken a lot of steps to ensure the Integrity of the supply chain continues and that we can provide product to customers.

Speaker 3

So I just want to make sure that's clear.

Speaker 8

Thank you, Patrick. Our next question is from Luke Sergott of Barclays. Luke, please proceed.

Speaker 5

Great. Thanks for the questions. So can you give us an update on the EC deadline suspension And ultimately what that means, and then as you guys kind of walk through the timelines and the appeals process, just give us an idea of how you could see that playing out if things don't go your way and then you appeal and then again, just from a timing perspective? And then Lastly, I just wanted to get an idea of the margin characteristics here throughout the year and the guidance and really how we should be thinking about the pacing there?

Speaker 2

Yes. So I'll take the first question, which is around Timing of the various regulatory processes underway. So first, in terms of our Phase 2 review with the European Commission. We are currently in the phase where we are in discussions around potential remedies that could work for this deal. And so the pause we're in right now gives both of us, both sides time to sort of work through that and discuss potential remedies together.

Speaker 2

And so what that means is it pushes the timeline out a little bit. Initially, the timeline was that we expected to get to a decision by the end of March. It's now looking like that decision is a Q2 decision. There's separately another process as you know going on in Europe around a case in Luxembourg looking at the jurisdictional issues associated Here. And that's a decision that's also likely in sort of the Q2 ish timeframe.

Speaker 2

And so we'll be watching So that the hearing happened in Q4 and we're waiting for a decision in that timeframe. That's the timeframe associated with the processes in Europe. If either of them go our way, where we're done and We're done with the European part of the process and we can start integrating. If the review doesn't go our way, there's still an appeal process that we could look at after that decision happened.

Speaker 3

Yes. And Luke, with regards to the margin evolution throughout the year, I mean, we'll We'll provide more updates on that as we go forward. We give you an update with regards to Q1 and what our guidance is for Q1 in terms of operating margins. We mentioned that Q1 is going to be a 300 basis points improvement from Q4 sequentially across consolidated alumina and we said that core alumina in Q1 Would be approximately 28%. Now going forward, we don't usually provide quarterly margin sort of comments, but we'll provide more updates as we go deeper into the year.

Speaker 5

Okay. Thank you.

Speaker 8

Thank you, Luke. Our next question is from John Sauerbeer of UBS. John, please proceed.

Speaker 12

Hi. Thanks for taking my question. So I think in your presentation with you last month, you said around 40% Mid throughput customers are currently in clinical and I believe around similar for the low throughput. Any thoughts on what the outlook is for 2022 on these? And What is the time line it takes to get to fifty-fifty, there?

Speaker 2

Yes. So I think I'll start. We have continued to see the percentage of our business, Tagging into clinical are continued to grow. So if you look at our overall sequencing consumable revenue, you've seen that sort of steadily grow from the late 40s towards the mid-40s now and that's continuing to grow. And if you look at how last year played out, you continue to see The clinical segment grow faster than the research segment.

Speaker 2

And so those lines are steadily going in one direction only. In fact, Last year, the largest single segment that we target became oncology testing, the clinical segment. And that's likely to continue to be our largest segment for a long time. So that's overtaken genetic disease research, which for a very long time, as you know, was our largest segment. And so, we don't have a specific timeframe around when it crosses 50%, But it's definitely heading in that direction.

Speaker 3

Yes. There is one other dynamic, John, that I would add.

Speaker 2

And but

Speaker 3

if you look over the last I mean to Francis' comments, if you look over the last 3 years, the growth of clinical has exceeded the growth of research and that just reflects both markets are growing Very robustly, but that just reflects the fact that clinical markets with regards to oncology testing, genetic disease testing, NIPT have been growing really, really At an impressive clip.

Speaker 12

Thanks for taking the question.

Operator

You're welcome.

Speaker 8

Thank you, John. There are no additional questions waiting at this time. So I'll hand the conference back over to Salli Schwartz for any closing remarks.

Speaker 1

Thank you. As a reminder, a replay of this call will be available in the Investors section of our website. Thank you for joining us today. This concludes our call, and we look forward to our next update following the close of the 1st fiscal quarter of 2022.

Speaker 8

This concludes the Illumina Q4 'twenty one earnings call. Thank you all for your participation. You may now disconnect your lines.

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Earnings Conference Call
Illumina Q4 2021
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