Illumina Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Salli Schwartz, Vice President of Investor Relations
• Francis deSouza, Chief Executive Officer
• Sam Samad, Chief Financial Officer

Analysts

• Daniel Brennan, Cowen Inc
• Tycho Peterson, J.P. Morgan
• Dan Arias, Stifel Financial
• Vijay Kumar, Evercore ISI
• Derik De Bruin, Bank of America Co.
• Kyle Mikson, Canaccord Genuity Group Inc.
• Sung Ji Nam, BTIG Research
• Puneet Souda, SVB Leerink LLC
• Tejas Savant, Morgan Stanley
• Patrick Donnelly, Smith Barney Citigroup
• Luke Sergott, Barclays PLC
• John Sourbeer, UBS Group AG

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2021 Illumina Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would like to now pass the conference over to Salli Schwartz, Vice President of Investor Relations.

[Salli Schwartz, Vice President of Investor Relations at Illumina]

Good afternoon, everyone, and welcome to our Earnings Call for the Fourth Quarter 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 activity, 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 illumina.com. Participating for Illumina today will be Francis deSouza, 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.

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 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. 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-K.

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

[Francis deSouza, Chief Executive Officer at Illumina]

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 our momentum and continued growth in 2022 and beyond. Let's start with our financial results for both the fourth quarter and full-year 2021.

Fourth quarter revenue of approximately $1.2 billion increased 26% year-over-year with strong growth across both instruments and consumables and across all-region. Full-year 2021 revenue of more than $4.5 billion dollars 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 instrument, and added more than 930 new instrument customers.

Over 50% more than in 2020 or 2019 delving now into each of our platforms, starting with high throughput. We shipped 384 NovaSeq units in 2021 with more than one-third of those instruments for oncology testing approximately 50% of NovaSeq orders in 2021, were to new to high-throughput or new to Illumina customers. 2021 NovaSeq consumable pull through of more than $1.3 million 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 1,100 NextSeq system, surpassing a 1,000 for the first time and nearly doubling 2020 shipments.

This volume was driven by growing NextSeq 550 demand in clinical applications like oncology testing and reproductive health. As well as NextSeq 1000, 2000 demand as customers expand into multiomic application. More than 20% of NextSeq 1000 and 2000 units this year were placed with new to Illumina customers as we continue to see new customers using higher throughput application. For low throughput in 2021, we shipped more than 1,600 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 market. Our clinical markets currently include testing for oncology, reproductive health and genetic disease. In 2021 our consumable shipments to clinical markets grew 42%, driven in particular by oncology testing where many customers are building out Comprehensive Genomic Profiling or CGP in 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 will develop personalized cancer treatments for patients with Nasopharyngeal Carcinoma, a cancer that occurs more frequently in Asia and our partnership with the Jean Perrin Center 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. GRAIL launched the Galleri test last year as the first clinically validated multi-cancer early detection test to be available to patients and providers. 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 1,500 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. 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 oncology testing and treatment initiatives to improve care and save lives. Beyond oncology, reproductive health also had a strong year in 2021.

This was driven in part by a 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 third 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 are already seeing an increase in coverage, with California, Oregon and Maryland Medicaid initiating coverage for WGS in the NICU setting. Expansion of programs for WGS and NICU settings are also occurring globally.

Including our recent project with Germany's Hannover Medical School to implement the use of WGS in NICU patient. 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 the WGS offer significant benefits for diagnosis of genetic disease and 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 effort that contributed approximately $220 million in total revenue. I'd now like to spend a few minutes on three key trends that will drive long-term growth. First 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 international healthcare system.

Our technology and genomics expertise, are enabling programs like our future health the UK's largest ever Health Research program that will deliver genetic analysis of DNA samples from up to 5 million 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 are tools to delayed diseases or change the course of their progression. We're excited to play a role in this project as the genotyping partner for that 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 the study other infectious diseases.

For example in South Africa. Dr. Tulio de Oliveira at CERI, 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 cost.

In addition to our partnership with Nashville 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 will 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. Our existing customers are growing their instruments 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. This will continue as customers need more complete genomic information and as NGS become standard in clinical setting. 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 to read 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. Illumina's 2021 performance and significant momentum entering 2022 demonstrate our strong position to support our customers and partners as these trends accelerate genomics in 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?

[Sam Samad, Chief Financial Officer at Illumina]

Thanks, Francis. As a reminder, our fourth 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.

Our record fourth quarter revenue again exceeded our expectations due to continued strength in our core business. The consolidated revenue growing 26% year-over-year to $1.198 billion. For the fourth quarter, GAAP net income was $112 million or $0.71 per diluted share, and non-GAAP net income was $117 million or $0.75 per diluted share, which included $0.66 of dilution from GRAIL operating losses and $0.09 of incremental dilution from the 9.8 million 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 rate. Our weighted average diluted share count for the quarter was approximately 157 million.

Moving to segment results. I will start by highlighting the financial results of Core Illumina. Core Illumina revenue grew 25% year-over-year to $1.193 billion 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 million 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 million, driven by record NovaSeq shipments due to continued new to high-throughput customer adoption and accelerating demand in oncology testing. NextSeq 1000, 2000 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.

Revenue from COVID-19 surveillance again exceeded our expectation driven by the sustained focus on variant tracking due to the emergence of the Omicron variant. During the fourth quarter, COVID-19 surveillance contributed approximately $42 million in sequencing consumables revenue, and $8 million in incremental instrument revenue. Core Illumina sequencing service and other revenue of $106 million 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 Illumina. Revenue for the Americas region was $619 million 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. EMEA delivered revenue of $350 million representing 23% growth year-over-year driven by strength in emerging markets, population genomics initiatives, and COVID surveillance testing. Greater China revenue was $121 million, representing growth of 26% year-over-year due to continued clinical strength in the region driven by the growing installed base and hospitals. Finally, APJ revenue of $103 million 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&L. Core Illumina non-GAAP gross margin of 71.6% increased 470 basis points year-over-year due primarily to increased fixed cost leverage on higher volume. Core Illumina non-GAAP operating expenses of $580 million were up $141 million year-over-year due primarily to headcount growth, increased performance-based compensation expenses, higher one-time partnership-related expenses, and the increased project spend driven by investments we are making in R&D and operation 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 expense compared to previous expectations. Core Illumina non-GAAP other expense of $8 million with $28 million lower than other income in Q4 2020 due to lower interest income on short-term investments liquidated the fund of GRAIL acquisition as well as interest expense on the terminals issued in Q1 2021.

Transitioning to the financial results for GRAIL. GRAIL revenue of $10 million for the quarter consisted of Galleri test fees and MRD partnership revenue. GRAIL non-GAAP operating expenses totaled $131 million 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 million, DSO was 49 days compared to 50 days last quarter driven by revenue linearity. Fourth quarter 2021, capital expenditures were $70 million and free cash flow was $212 million. We did not repurchase any common stock in the fourth quarter.

We ended the quarter with approximately $1.3 billion in cash equivalents and short-term investments. Moving now to 2022 guidance, we expect full-year 2022 consolidated revenue to grow 14% to 16% to approximately $5.16 billion to $5.25 billion. We expect full-year 2022 core Illumina revenue to grow 13% to 15% so approximately $5.11 billion to $5.2 billion. GRAIL expects its revenue to be in the range of $70 million to $90 million for 2022, consisting primarily of Galleri test fee. 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 inter-company sales to GRAIL of approximately $25 million which are eliminated in consolidation.

We expect core Illumina sequencing instrument growth of approximately 10% year-over-year driven by continued strength in NovaSeq and NextSeq placements. 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 the strength to expand our platform. And we are raising our pull-through guidance for NovaSeq to a range of $1.2 million to $1.3 million per system for 2022. We expect pull-through for NextSeq 1000, 2000 in the range of $130,000 $180,000 per system in 2022. And pull-through for NextSeq 5-50 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 million $150 million in 2022. We expect consolidated non-GAAP operating margin in the range of 15.5% to 16% and core Illumina non-GAAP operating margin of approximately 28% for 2022. 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 9.8 million 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 million shares. For the first quarter of 2022 for consolidated Illumina we expect revenue to increase 10% to 12% year-over-year from the first quarter of 2021. This represents a sequential increase from the fourth quarter of 2021, reflecting a strong start to the year.

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 million shares. For core Illumina, 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.

[Francis deSouza, Chief Executive Officer at Illumina]

Thanks, Sam. To close, I'd like to thank our teams, our network of partners and the extraordinary scientists and commissions we serve. I am incredibly excited for the many opportunities ahead. Today, more than 1 billion 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.

Some oncology therapy selection to reproductive health, genetic disease testing and pathogen surveillance. We will also continue to push genomics to new frontiers like drug development in 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 development including our breakthrough Chemistry X and our Infinity long read technology. We expect to not only directly address unmet market needs, but also revolutionized with scientists and clinicians can expect from sequencing. Together we are enabling genomic-based discoveries that can transform healthcare and ultimately provide a brighter future for human health.

I now invite the operator to open for Q&A. Operator?

Questions and Answers

[Operator]

Absolutely. [Operator Instructions]

Our first question goes to Dan Brennan with Cowen. And your line is open. You can go ahead.

[Daniel Brennan, Analyst at Cowen]

Great, thanks. 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. But as you would expect material interests in Chemistry X and Infinity, particularly in light of some of the expected competitive launches that will be coming between now and around HBP. So I'm just wondering, you've laid out some basic metrics on read line to accuracy in speed and you talked about revolutionizing things, an 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 not going to give us new flashes at this point, but particularly around some of the unmet needs that might be addressed and or this IBO revolutionizing, thanks, because arguably Illumina has done a terrific job of 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, trying to get some more color. Thank you.

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah. 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 we go through each of them a little bit. With Chemistry actually 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 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 so scaling up production. 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 rethink of our Chemistry.

Probably the single biggest advance in our Chemistry since Solexa was created all those years ago. What this means for our customers and in terms of the industry as we can -- you can expect a step-change in terms of the speed of the chemistry and that will translate into much faster turnaround times for the test that our customers are running and that's especially relevant for not just very large scale research products -- but projects, but especially governs 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 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 manufacturing 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 our new products coming out and there is 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 re-thought how people think about long reads and short reads, and again went back to first principles to say what customers don't want is they don't want two 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 reads. And so when we looked at how we would rethink long reads, we brought some of the best of those elements in to say low input requirements, lower costs, 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. 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 J.P. Morgan. Tycho, your line is open. You can go ahead.

[Tycho Peterson, Analyst at J.P. Morgan]

Hey, thanks. On guidance, 10% sequencing instrument growth, I'm just wondering if you'd give 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 X being rolled out? And then a follow-up on GRAIL guidance as well. $70 million, $90 million is a big step-up from $10 million in the fourth quarter, so can you just talk a little bit about scale-up plans and how you plan to get there?

[Sam Samad, Chief Financial Officer at Illumina]

Yeah, so maybe I can start, Tycho. This is Sam, and thanks for the questions about the guidance on instruments and I'll just provide a couple of brief comments. 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, 1000, and we talked about in '21 the record performance across those two platforms.

Now there is a headwind, which is the COVID surveillance. 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 guidance. For NovaSeq Dx, that's the product that we're very excited to launch, it will be launched later this year. It does not represent a material impact in terms of growth for instruments in 2022. So, Francis, maybe...

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah, so let's talk about Chemistry X 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 Illumina 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. 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 in 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 with everything 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 instrument for example, and use that to develop their new workflows, to get familiar with the new instrument, and then plan an upgrade over a multi-year period. 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 an upgrade over a multi-year period.

[Sam Samad, Chief Financial Officer at Illumina]

GRAIL.

[Francis deSouza, Chief Executive Officer at Illumina]

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've said with employers and what's been interesting there is we expected traction with financial services companies, with tech companies, the other 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. We've seen, as we said, large logistics players and transport players that have 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 1,500 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 are -- that have some experience now with Galleri and should be more comfortable order it going forward.

In terms of the guidance, most of the guide for a Galleri -- for GRAIL this year is Galleri. There is a component of it associated with the 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 the traction they're making in that space.

[Operator]

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

[Dan Arias, Analyst at Stifel Financial]

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 pricing 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 a NextSeq or a MiSeq?

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 a whole genome? Thanks.

[Francis deSouza, Chief Executive Officer at Illumina]

Yes. Let me start with Chemistry X and what it could mean. We know just apples-to-apples, Chemistry I versus Chemistry X that you will get significant cost reductions with Chemistry X. Now, ultimately that looks like depends on everything else [Technical Issues]

[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. Anything like that?

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah, let me -- 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 will 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.

[Vijay Kumar, Analyst at Evercore ISI]

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, 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 twice as high to talk about the visibility into the guide enough, Francis, I think on the 70% to 90% throughout GRAIL is that the gross contribution? If there are some intercompany elimination that number, is that a net number. Is there a proxy for a Galleri volumes? Thank you.

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah, 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. 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 -- is very strong. We're seeing very strong momentum on clinical with oncology testing and genetic disease testing in NIPT and our research markets are also robust. We have a very strong backlog as we set a record backlog, in fact, in terms of instruments. 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 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 million to $150 million in terms of COVID surveillance revenues, that's a step down from last year. It's at the midpoint, approximately $80 million of the step-down. We've also reflected a step down in terms of population genomics driven by the termination of the UK Biobank, the finishing of the wrap-up of the UK 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 exceeded $1.3 million per instrument and we're reflecting a pull-through guidance range of $1.2 to $1.3 million to make sure that we factor in these 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.

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 three and the uncertainty that goes with that. With regards to GRAIL to $70 million to $90 million that's end the GRAIL sales to their customers. So we do have intercompany elimination of revenues that impact our total consolidated Illumina revenues. But the $70 million to $90 million is the total end GRAIL sales to their customers. That's not impacted by inter-company 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.

[Derik De Bruin, Analyst at Bank of America]

Hi, good afternoon and thank you for taking my question. So two related questions. One on the new platform you're alluding to, are you going to take a HiSeq X approach in basically segment this and make it for like whole human genome or single-cell applications where you're going to make it broadly accessible and then a follow on that is, yeah, I can certainly see elasticity of demand in the research market, 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. Thanks.

[Francis deSouza, Chief Executive Officer at Illumina]

Great, thanks, Derik. So let's take both and this new chemistry can be applied across the throughput spectrum. So all options at this point are on the table there are options like you said, where we could create an instrument that targets a catalyze is a segment of the market. So is, as you're alluding to HiSeq X was extraordinarily successful and opening up the whole-genome sequencing market that before HiSeq X enabled $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 to do whole-genome sequencing and so one of the options on the table that Chemistry X will allow us to do is again look for opportunities like that to catalyze certain segments of the market. I mean you can 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 to be able to do much, much, much larger experiments with 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 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 as 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 application.

So even if 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 are 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 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 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. Hi, operator.

[Operator]

Our next question goes to Kyle Mikeson of Canaccord. Your line is connected. You may proceed.

[Kyle Mikson, Analyst at Canaccord Genuity Group]

Great, thanks for taking the question. So just a 2-part question. So most of these new platforms are 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 early focus for you as it maybe that will into any clinical market share growth in the near to medium term that in the part of the market that's kind of under-penetrated right now. And the second part of my question on to ask was, I mean, Francis, you mentioned earlier the Biden administration relaunch the Cancer Moonshot initiative and references multi-cancer early detection test particularly involving studies or trials to accelerate development and market adoption of the MCED tests. So I'd just like to understand your level of confidence that initiative is going to move the needle for the MCED industry overall? And importantly, could it improve the domestic or global perception of the merger, specifically with GRAIL obviously and potentially have any downstream impact on the ongoing trials or reviews? Thanks.

[Operator]

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

[Kyle Mikson, Analyst at Canaccord Genuity Group]

Sure. Can you hear me?

[Operator]

We can.

[Francis deSouza, Chief Executive Officer at Illumina]

We can.

[Kyle Mikson, Analyst at Canaccord Genuity Group]

Perfect. Okay, the two-part question. The first of which was most of these kinds of competing new CERI platforms that are launching in the near term or low to mid-throughput which is suitable for the clinical market, that's going to be the early focus for these emerging companies. I'm just wondering if you think that's going to lead into any clinical market share growth in the near to medium term given the area is still pretty under-penetrated?

And then the second question I had was about GRAIL with the Cancer Moonshot initiative that the Biden administration have announced recently. Mentioned there's multi-cancer early detection tests. I just want to understand if you think the initiatives going to move the needle for the MCED industry overall, and could it improve the domestic or the global perception of the merger, specifically, and potentially have any downstream impact on the ongoing trials or reviews?

[Francis deSouza, Chief Executive Officer at Illumina]

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 launch the NextSeq 1000, 2000 that are squarely targeted at that space. And we think they're especially well-suited for the clinical markets because you have the -- from a clear perspective the MiSeq Dx, the NextSeq Dx that our workforce is already in the clinical market. And then you have the terrific price performance that you get out of the NextSeq 1000, 2000. Those instruments, NextSeq 1000, 2000 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. 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 leads we're seeing in the market that there is this insatiable demand 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.

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, a simple test are an important thrust in terms of this fight against cancer. And so just the attention being put on this space, I think is 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, 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. So that's obviously really exciting from a GRAIL perspective.

[Operator]

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.

[Sung Ji Nam, Analyst at BTIG Research]

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 that are available on the market today? And then could we expect potential interim data readouts throughout this year?

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah, 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 kinds 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. 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 is much faster from that perspective. And so that's another key metric to watch for.

And then in terms of the performance of the Galleri test in terms of sensitivity and specificity for early detection is it's really strong. It has an extraordinarily low false positive rate and since it's -- 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 to high positive predictive value into the MRD market.

[Operator]

Sung Ji, does this answer your question?

[Sung Ji Nam, Analyst at BTIG Research]

Yes. Thank you.

[Operator]

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

[Puneet Souda, Analyst at SVB Leerink]

Thanks. Francis and Sam, thanks for taking the question. I'll just ask two in one. First one is, I know you've been asked quite a bit about Chemistry X already, but just want to clarify that the benefit of the Chemistry X is equal across all applications from genome to exome to routine RNA-Seq to single cells? Just want to make sure. And then, does it get you closer to $100 genome or $100 genome more 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 is 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 reads? So this is being viewed as a synthetic so I just want to make sure we're thinking about that correctly. Thank you.

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah, so let me take, Puneet, your questions in order. First, 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, 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 in 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 in and whatever it instrument type.

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 techs 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 instruments in the field, that's really great news.

In terms of the 10kb, it's absolutely not at the lower end, to be honest. It's exactly where some of the other long read 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.

[Puneet Souda, Analyst at SVB Leerink]

Got it. Thank you.

[Operator]

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

[Tejas Savant, Analyst at Morgan Stanley]

Hey, guys. Good evening. A two-parter for you, Francis. Just a point of clarification first on Chemistry X. I think I heard you mention earlier that you might bring it to some parts of the existing portfolio as well. 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 $950 list price or are you assuming a lower effective ASP in your guidance assumptions?

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah. 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 foing forward, but to your point, there is no technical reason why selectively we couldn't bring Chemistry X to parts of the current portfolio. We don't have plans that we've announced around that at all. But technically speaking that's -- it's absolutely backward compatible for some parts of our portfolio.

And then the GRAIL..

[Sam Samad, Chief Financial Officer at Illumina]

Yeah, let me take that one, Francis. So with regards to GRAIL, Tejas, and thanks for the question by the way, no I would not assume that actually. The price is, as you said that approximately $950 range, but I would not assume that that price is uniform across that the 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.

[Operator]

Tejas, does this answer your question?

[Tejas Savant, Analyst at Morgan Stanley]

Yes, I'm good. Thank you.

[Operator]

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

[Patrick Donnelly, Analyst at Smith Barney Citigroup]

Hey, guys. Thanks for taking the questions. There might be one for you, Sam. Just in terms of the backlog, obviously encouraging to hear it's almost doubled 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? 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 expectation there for the next couple of quarters having normalized a bit for you?

[Sam Samad, Chief Financial Officer at Illumina]

Yeah, I think the simple answer, Patrick, and thanks for the question is really it's organic build. 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 consumables, 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 the 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 the products. So we have not seen really disruptions in supply chain given some of these actions aside from very isolated cases that we see traditionally that -- 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. So I just want to make sure that's clear.

[Operator]

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

[Luke Sergott, Analyst at Barclays]

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 in the appeals process, just give us an idea of the -- of how you could see that playing out if things don't go your way and then your 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?

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah. So I'll take the first question, which is around timing of the various regulatory processes underway. So first in terms of our Phase II 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 positive thing right now is both of us -- both sides are trying to sort of work through that and discuss potential remedies together.

And so what that means is it pushes the timeline out a little bit. Initially, the timeline was that we expect it to get to a decision by the end of March. It's now looking like that decision is a Q2 decision. So separately in other processes going on in Europe around a case in Luxembourg looking at that jurisdictional issues associated here, and that's a decision that also likely in sort of the Q2-ish timeframe and so we'll be watching for that. The hearing happened in Q4 and we're waiting for a decision in that time frame. That's the time frame associated with the processes in Europe.

There -- if either of them go our way where we're done and we can start -- we're done or the European part of the process and we can start integrating. If the review doesn't go our way, there is still an appeal process that we could look at after that decision happens.

[Sam Samad, Chief Financial Officer at Illumina]

Yeah. And look, with regards to the margin evolution throughout the year, I mean 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 margin. We mentioned that Q1 is going to be a 300 basis points improvement from Q4 sequentially across consolidated Illumina. And we said that Core Illumina 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 the year -- as we go deeper into the year.

[Luke Sergott, Analyst at Barclays]

Okay, thank you.

[Operator]

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

[John Sourbeer, Analyst at UBS Group]

Hi. Thanks for taking my question. So I think in the presentation here last month you said around 40% mid-throughput customers are currently in clinical, I believe around similar for the low-throughput. Any thoughts on what the outlook is for 2022 on these and what is the timeline it takes to get to 50-50?

[Francis deSouza, Chief Executive Officer at Illumina]

Yeah. So I think -- and I'll start. The -- we have continued to see the percentage of our business tug into clinical continue 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, we continue to see the clinical segment grow faster than the research segment.

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 time frame around when it crosses 50%, but it's definitely heading in that direction.

[Sam Samad, Chief Financial Officer at Illumina]

Yeah, there is one other dynamic, John, that I would add [Technical Issues] and of total Illumina revenues. And -- but if you look over the last -- I mean to Francis' comments, if you look over the last three 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 the clinical markets with regards to oncology testing genetic disease testing NIPT has been growing really, really at an impressive clip.

[John Sourbeer, Analyst at UBS Group]

Thanks for taking the question.

[Sam Samad, Chief Financial Officer at Illumina]

You're welcome.

[Operator]

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.

[Salli Schwartz, Vice President of Investor Relations at Illumina]

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 first fiscal quarter of 2022.

[Operator]

[Operator Closing Remarks]