Illumina, Inc. (ILMN) Earnings Call Transcript & Summary

Well, great. Thank you, everyone, for joining us here at the Citi Healthcare Conference. I'm Patrick Donnelly, I cover the Tools, Diagnostics and CROs here at Citi. Happy to have Sam Samad, CFO of Illumina, with us today for this session. We'll do about 35 or 40 minutes of questions. Investors, if you have any questions, feel free to e-mail me. I will try to get them in. And Sam, I know you want to do a quick safe harbor. So I'll turn it over to you.

Yes. Thanks, Patrick. Thanks for having me today. Really a pleasure to be with you. So I will do a safe harbor, and then we can go straight to the questions. I've been asked to remind you that my comments today could include forward-looking statements. You should refer to our SEC filings for a discussion of the risks and uncertainties that could cause results to differ materially from our current expectations. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's discussion will be protected under the Private Securities Litigation Reform Act of 1995. 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 2 companies must be undertaken at arm's length.

Okay. Perfect. Yes, we'll try to keep the GRAIL questions to a minimum, I guess. So maybe we'll start on the core business, and we'll certainly jump into the new product flow in a bit. But clearly, the core fundamental side is doing quite well. You guys are coming off a really strong '21. Guidance implies more of the same here in '22. I think particularly on the instrument side, maybe it's been a little surprising to the upside, calling for continued, I think, 10% type growth in '22, really strong backlog. So maybe talk about the instrument side, maybe we can start with NovaSeq coming out of '21 placed, I think, 385, 384 systems, 1/3 of those into oncology. Maybe talk about the strength there, again, calling for that to be quite sustainable going into '22. What are you seeing there? Is that market really just taking off for you guys? Maybe we can start there, and we'll jump in a little bit more.

Sure. Absolutely. I think you called really some of the key things driving -- the fundamentals driving our instruments business, Patrick, and also the factors that we saw in 2021, exceptionally strong year for us on the instrument side and on the consumables, but instruments, in particular, growing over 70% year-over-year. As you said, the expectations for 2022 in terms of our -- what's implied in our guidance is approximately 10% instruments growth. Some of the fundamentals, here's what's driving instrument demand and what's really interesting, some key dynamics that we're seeing in terms of the order book. For NovaSeq specifically, which is in its fifth year of launch and had a record year in 2021 with 384 placements, that's the highest we've ever seen for that instrument. As you said, almost 30% -- just over 30% actually of the order book and of the placements are in the oncology testing space. That has never been the case for a high-throughput instrument. Usually, it's, I would say, an emphasis and a high proportion of the instrument placements will be in the research space. But with NovaSeq, we're seeing, with the dynamics that are driving the clinical markets today, and I'll talk a little bit about that, we're seeing more and more of those placements be focused in the oncology testing space. We're also on the -- looking at it from a different lens, more than 50% of the orders are also going to new to high-throughput or new to Illumina customers. So what we are also seeing is not just the placements being more and more focused in clinical, which drives the sustained demand driven by the end markets, the applications, the testing needs with patients, but also, we're seeing that there's more and more decentralization of the customers that we're seeing because more customers are emerging in the -- whether it's oncology testing space who -- in the genetic disease testing space, and more customers are starting to do sequencing, not on a MiSeq or a MiniSeq but more so on a NovaSeq. So we're seeing that evolution to the higher throughput instruments that's driving that demand. So the dynamics are really favorable on the mid-throughput side as well beyond NovaSeq. We saw record demand last year in terms of mid-throughput for NextSeq 2000, 1000 and for 550. So really feel confident about the sustained demand on the instrument side.

Okay. Great. Yes. And maybe just a little bit on the backlog. Again, that's certainly been a metric you guys have cited a few times. I guess is that what gives you the confidence level to kind of talk about that 10% growth for this year. Again, I think it's a number probably ahead of expectations. How much of that comes from the backlog? And then again, can you just talk a little bit about that backlog growth that you've seen over the past couple of quarters?

Yes, absolutely. Good question. And there's a couple of things -- there are a couple of things that give us confidence about the 10%. One is the backlog. I mean we're entering the year with a record instrument backlog, almost double of the -- double the backlog of what we entered 2021 with. And that backlog is concentrated with, I would say, more NovaSeqs and also NextSeq 2000. So the higher value instruments, I would say, dominate that backlog. It's diverse, but there's a concentration of NovaSeq that drives that backlog. That's one. The other thing that really underscores and really underpins our confidence here is the -- we have visibility to the capacity out in the market in terms of the instruments that are placed with customers. We have good visibility, very good visibility in the U.S. We have good visibility in EMEA. We don't have as much visibility in Asia, specifically China, but we have connectivity of instruments we can understand and see what the capacity that's available on our instruments is, what the utilization is, and I can tell you that the capacity that's available on the instruments is the lowest it's been in a number of years. So in other words, not only are we placing a significant amount of instruments, and we have a record backlog. We have record placements last year across the board, but NovaSeq specifically, but also the capacity that's available is the lowest on those instruments that are placed, which means that there's potentially the need for more capacity build out as we go forward in the year. So that gives us a lot of confidence on the 10%.

Okay. That's helpful. And then to your point on kind of the utilization rate, the pull-through, obviously, NovaSeq put up some really big numbers as we went through the end of the year, calling for another strong year in '22. I think a big piece of it, as you touched on a little bit earlier, is kind of that clinical and oncology market, it seems to really hit an inflection point in '21. Can you talk about that inflection? And then again, I guess, where are -- it seems like we're quite early in the adoption curve, but maybe talk about where we are there. And again, the sustainability, it feels like this is a multiyear certainly ramp, but maybe talk about what you're seeing in the market, what caused that inflection and the confidence level not continuing for a little while here?

Sure. Yes, absolutely. I mean there's a lot of factors there that are impacting NovaSeq utilization and also NextSeq utilization positively in this case. I think you've touched on a couple of them. The clinical utilization is getting more and more, I would say, sustained and higher and customers using their instruments more. And here's what's driving it, Patrick, in terms of utilization itself, the more and more migration towards larger panels in oncology, so comprehensive genomic profiling being a key driver. It used to be that the standard was more smaller panels being run. Now it's more and more becoming larger panels, which really favors the adoption of our instruments, our high-throughput instruments and instruments like NextSeq 2000, 1000, but also the adoption of our end-to-end diagnostics like TruSight Oncology 500, which is a 500-plus gene panel. That's on one hand. The other hand is the market as a whole, whether it's coverage, reimbursement and also guidelines. And we are seeing now really a new -- I would say, a new sort of reality in terms of coverage where more and more, we're seeing lives being covered for genomic tests. In 2021, we crossed that $1 billion threshold of lives being covered for genomic tests across the globe. By 2026, we expect that number to double to $2 billion. So there's more and more coverage, more and more, I would say, guidelines favoring the use of comprehensive genomic profiling. In genetic disease testing, where we also have good coverage in the U.S., we have approximately 450 million lives covered. There's more also emphasis now on clinical whole genome sequencing, not just running exomes or running panels, but really the understanding, the recognition that as you run whole genomes for genetic disease testing, you're able to get a better diagnosis. You're able to recommend maybe earlier therapies to genetic disease patients that can help with their -- with them thriving and recovering. So a number of dynamics that are favoring clinical adoption. In terms of where we are, I would say for all of the applications that we're in, early days, but some more early than others. In terms of oncology, the U.S. is the highest penetrated in terms of therapy selection, and it's still in the mid-teens at best in terms of penetration. Across the globe, I think we probably come down to high single digits, maybe low double digits, and there's still a lot of room that's in therapy selection. Recurrence monitoring, I would say, less penetrated. Obviously, early cancer screening very underpenetrated -- no penetration yet, but a lot of promise in terms of penetration. Genetic disease testing, we're still in the 1% penetration of those lives. So when you think about the runway going forward, tons of potential, tons of potential for more adoption and for more coverage to come.

Sure. Yes. It's a good overview. And then maybe on the POPSEQ side, again, we saw a few of those take off in '21 even the U.K. one getting completed. So can you talk about the funnel there. Again, it was kind of long awaited, it took a couple of years to get going, but it seems like there's real momentum now. So maybe just talk about that market, what you're seeing, the activity and kind of the pipeline there as well.

Sure. Yes. Here's the way we look at population genomics now, Patrick, and the funnel that's there. And so it's roughly -- there's roughly about, I would say, 30-plus population genomics initiatives that are ongoing. That was the case last year. That's the case that we expect this year. There aren't as many anymore of those big bang, hey, we're going to do a huge amount of samples and run a huge population genomics initiatives. If it happens, great; if it gets delayed, it might have an impact on our numbers because it's so significant. I mean there will be still occasionally those, but we're also being very careful in terms of how we build those into our guidance. But there's a constant flow of these 30-plus population genomics initiatives that are really important for adoption of sequencing and genomics in clinical care. I think that's the way we look at it. It's -- these start out as research projects, whether they're 500,000 samples, maybe 1 million samples. But then with the goal of really understanding disease predisposition, understanding different disease states, and introducing sequencing in clinical care. We saw that in the U.K. We see that in a number of countries across the globe where that's the endpoint. For this year, as I said, we have about 30 plus of those in varying stages. The way we build these into our financial guidance now is that unless a population genomics initiative is ongoing or we have almost perfect visibility as to when it's going to start, we don't build it into our guidance. So in terms of year-over-year, in 2022, our expectation, what's embedded in our guidance the 14% to 16% revenue growth that we have for the year, is a $60 million reduction in population genomics revenue contribution because we had the UK Biobank last year that concluded in Q3 and we're not assuming any major new ones in 2022, except for those 30, as I said, there are some finish, some starts, et cetera. The final thing I'd say is there are a couple of other important ones. There are the big ones that are ongoing like all of us, like the NHS one that we are continuing to work through with our gel labs, and there's also the -- Our Future Health that we talked about on our last earnings call, which is a new population genomics project. It's going to start out as a genotyping project on an array platform, but with a $5 million sample potential.

Okay. That's great. And then maybe on the NovaSeqDx launch, how material should we expect that to be in terms of numbers this year? Maybe just kind of help frame the expectations around that?

Yes. So we are planning to launch NovaSeqDx in the second half of this year. It's going to be a really important instrument for our clinical customers and for clinical usage. I think in the U.S., it's going to be important. But also outside the U.S., it's going to have significant importance for Chinese customers, for instance, that -- we're seeing very strong demand for NextSeqDx and there's a lot of interest in a high-throughput instrument that's also clinically validated, which is really important for the China market. And for Europe as well, I think we'll see strong demand for it. In terms of the -- what's the materiality or what's included, I mean basically, it's immaterial this year, Patrick. There is -- in the guide, there isn't any really material contribution from NovaSeqDx in our guide in 2022.

Okay. That's helpful. And then maybe last one on the instrument side. Just in terms of the supply chain side, I know you guys a quarter ago kind of called out some delays. It seemed like you really worked through it nicely. 4Q did not seem to be as evident, and it doesn't seem like you're calling for much sheer, but kind of have to ask. So what do you see on the supply chain side. And then particularly, again, as we approach the new products, we'll get to in a second, any concern there in terms of building a larger number to kind of deploy?

Yes, I'd say the very short answer is no concerns and no negative impact from supply chain. The slightly longer answer would be our supply chain team has done an incredible job managing through a very tough environment. So it's not like, hey, everything worked out, and this is not impacting us. They have done a lot of -- taken a lot of measures, implemented a lot of redundancy in the supply chain, whether it's through looking for alternative sources, for some raw materials, whether it's through building our own potential in-house manufacturing of certain components or products that we can manufacture, whether it's expanding our DC capacity and, in some cases, building out new distribution centers or whether it's increasing safety stock on consumables up to the 8-week, 9-week maximum that you usually would hold. Usually, our safety stocks are somewhere between that 6 to 9. So bringing them up to the high end of the safety stock threshold. So our supply chain team, I think, has done a really fantastic job in a very tough environment. We see occasional pockets of disruption with some customers, but there's nothing that's unusual that's impacting our business negatively.

Okay. Yes, maybe we can jump to the new product side. Maybe we can start with Chemistry X. You guys have certainly talked quite bullishly about this, I think Francis kind of said it's the most significant development since Solexa, which has obviously caught a lot of people's attention. Can you just kind of talk through how to think about this redesign of SBS to get any metrics that you guys are willing to give, obviously, we'll welcome. But maybe at a high level, kind of talk through the approach here and then we can talk maybe timing and some of that stuff after.

Yes. So I can't get too much into the technical details. I think we will be in a position to talk a lot more about that in future customer conferences, industry meetings, and we'll be giving more updates on this. But I will orient you and the audience here with some of the aspects of Chemistry X, why we're so excited about it. We do believe this is revolutionary. This is not a new iteration of SBS. This is really from the ground up, reimagining of our Chemistry and significant, significant upgrade. Gives us also patent runway until potentially 2037 on some of the patents related to it. It's really a redevelopment of everything from the dies, the linkers, the blocks, the polymerases. So really taking everything that goes into our Chemistry and redeveloping it. In terms of some of the high-level metrics that we've shared already that I'm comfortable sharing, it's basically 5x the increased density. It's twice the faster cycle times, twice the longer REITs, 3x the accuracy. So a lot of things that we will dive into more deeply as we start to give more technical updates around the product. Importantly, Patrick, this is the Chemistry that takes us to the $100 genome and below. The introduction of this Chemistry will drive lower cost of sequencing as we have indicated back in 2017 when we said we see a future which has the $100 genome. Well, that future is almost here now. And it doesn't mean that the $100 is where we'll go to after the $600 of NovaSeq, but we now have the path that gets us progressively towards that $100. So the $600 price that we have today might irrevocably go down to $100, doesn't have to be that that's where we go next. But what's really important is that this opens up new applications or existing applications that are really sensitive to that price point that are elastic to that price point, applications within single cell, which is an expanding application and market that we believe a lower price of sequencing will really help drive more adoption in larger cohorts and bigger sample sizes. Proteomics is another one. Spatial is another one. So there are some of these applications, just like liquid biopsy was back in '17 with NovaSeq that really are sensitive to this additional or lower price point that can expand. So we're really excited about this. This will be the foundation of all of our new instruments. Every new instrument launch that we make will be on Chemistry X. And it could potentially be back -- ported back to the existing instruments, but we haven't quite made a formal decision on that yet and an announcement as to whether we'll do that or not.

Okay. And I know you guys kind of -- you've been pretty transparent in terms of -- from the research phase into product development, now we're in manufacturing. I think you have a whole facility dedicated to it. So I guess where are we in that. And then to your point, I guess, when will you guys decide kind of on the retroactive fitting to the rest of the fleet?

Yes. The short answer is on the manufacturing, we're now in production mode. We've gone past the product development. We're in production mode. We have built a manufacturing facility, as you said, that's a stand-alone, separated one from the existing manufacturing because the manufacturing process is completely different. And we are ramping up full production. In terms of decision on backwards compatibility. No time frame yet, Patrick. This is something that we're assessing. We're assessing how it will take place, what needs to be done on the existing instruments. There's some product development, I would say, road map work that needs to be identified but we'll keep the market posted.

Okay. That's helpful. And I guess, along with the product introduction has come a lot of questions around -- between now and then, there may be some competitive launches obviously out there. I guess what's your view on the competitive landscape. Again, is Chemistry X changed the game in terms of what these competitors are you bringing? And I don't want to say it, makes them irrelevant when it arrives. But how do you think about this as a response to that? And then again, the competitive landscape with maybe a few launches upcoming?

Yes, I mean, listen, this is a fast-growing market that's in the very early stages of adoption. So it's the right market for new players to come in and look to also drive adoption. And I think that this is going to be the case this year, next year and beyond. But do any of these launches really threaten our positioning or our ability to really play in these markets or continue to offer a superior product, superior experience to our customers? Absolutely not. We have seen this before with a lot of companies coming into the space, finding that it's difficult when you don't have the scale that Illumina has and frankly, you don't have the innovation that Illumina has nor do you have the customer support, the customer experience that Illumina can offer with the 20,000 instruments that we have that are in the installed base with the 8,000 customers that we have with 140 countries that we play in. Here's a couple of things about this market that are different than what it was even 10 years ago, or 5 years ago. One is it's increasingly clinical, so you need validated workflows, validated instruments, you need to make significant investments in regulatory reimbursement, clinical manufacturing, IVD manufacturing, all of that. And so difficult for as the company that doesn't have scale to be able to ramp and have that clinical focus and competencies. And the other one is it's increasingly global. More than 50% now of our customers are outside the U.S. and so we've crossed that threshold, and we're going to continue to see more global contribution to our revenues. And again, it's difficult to compete. If you're only playing in research in the U.S., you might take a few customers here or there. But to compete globally and to compete on a clinical scale, that's a lot more difficult. We have every confidence that Chemistry X is definitely a differentiating advantage and the platforms that will come on Chemistry X will be a huge, huge advantage from an innovation standpoint over any new players that enter the field. And the field is also increasingly high throughput, and that's where we play best.

Sure. Yes. And Chemistry X isn't the only product in the portfolio pipeline here. Maybe we can talk a little bit about Infinity you guys are kind of moving into the long-read space. Can you just talk about that decision, the market opportunity for you guys. I know you've given some data in terms of the 10 kb length. But I would love to hear a little more about that product and plans there.

Yes. I mean we approach this really from a customer perspective going, okay, this is a 5% of the market opportunity, but it's an important one because in some cases, there's -- as we've always said, a very complementary, very complementary use cases between short-read and long-read. And our customers have to do a lot of short-read sequencing on a number of Illumina instruments, let's say, a population genomics project where they're doing ad scale sequencing and they need the cost efficiency of short reads. They're doing a lot of that. But then they have to also do a second workflow potentially for those very specific applications or to get certain coverage on the genome on long-read applications. And they'll use maybe another instrument from one of the other players that have long-read capabilities. This is a huge advantage to our customers that are doing complementary short reads and long reads because you can now do them on 1 workflow. One workflow, 1 instrument, 90% less DNA input requirement, as you said, the 10 kilo basis of long read length and 10x the throughput, so much faster and lower cost. The inhibiting factor for long read so far has been the cost and the throughput and this really achieves that. So cycle times reduced. So we think for the customers that we serve, this is really important. It's 5% of the market, but there's a very important complementary nature to these applications.

Yes. And I assume you guys, given your dominant presence on kind of short-read side and again, the amount of instruments you have out there, the view would be you can kind of leverage those relationships to kind of sell Infinity as well. Is that kind of the right way to think about the commercialization part of it?

I think the right way to think about it, Patrick, is that what's really in the best interest of customers from a really use case standpoint, the ease of use of this application because if you're a customer and you have 2 different workflows and you have to run 2 different workflows and then run 2 different instruments and buy 2 different instruments, that is very cumbersome and that's very expensive. So forget about every other advantage that I talked about, whether it's the throughput advantage, whether it's the less DNA input advantage, just the practicality of business so important for customers. And we think that's really what's going to drive them. You've got a provider, an instruments provider here that's giving them 1 workflow to run all of their applications on. I think that where they have long-read needs. And I think that's really important.

Okay. And maybe just shifting to GRAIL for the last few minutes here. You guys put out guidance of kind of $70 million to $90 million for this year. I think it was well ahead of expectations. Maybe just talk about the confidence level there, kind of the build towards that to where we are in the commercial kind of sales force build. Maybe we can start there.

Sure. Yes. We have a high degree of confidence in the guide. This is GRAIL's guide, but we work closely with them on, obviously, the funding needs for their budget, and we get details on the assumptions. So we have good confidence around the guide that they are giving. Obviously, since we're giving the full consolidated guide, we need to be very confident in their achievability and the achievability of their numbers. Here are some of the things that really excite us about the progress they've made so far, Patrick, and why we are confident in this guide. One is the progress that they're making with providers. I mean they've had a 1,500-plus providers that have prescribed this product in a short period of time. They have a number of health systems that are offering this test to their members, systems like the Mayo Clinic, like the Cleveland Clinic, other cancer centers that are adopting this now and starting to offer it. They've collaborated with the NHS. It's not a revenue contributor yet, but it will be in '23 or '24 when they start to really -- when the NHS rolls this out broadly to its members in the U.K. and could be 2 million people that basically take this test. We're seeing self-insured employer progress that we're really excited about, 11 so far that they've signed and looking to sign more. So they are rapidly scaling up. I think their focus this year, to your question, is continuing to build the dossier and the evidence portfolio for their FDA submission. So R&D expenses are going to be a key part of their scale up this year in continuing to drive the clinical trials. There's PATHFINDER 2. There's the NHS pilot, and there's other clinical trials that are ongoing like STRIVE and SUMMIT. Then commercial scale and growth is something that they're going to be investing in this year, building out that sales force to go to providers. And finally, just support, support infrastructure, whether it's regulatory, reimbursement, et cetera, we're not integrated yet, so they can't tap into us for some of these. There's going to be some synergies eventually when we do integrate. But at this point, they need to build out some of their support functions.

Sure. Yes. And I know a few days ago, you guys announced kind of the GRAIL collaboration with Point32Health. They're going to offer the test to certain of their members. Is this how we should kind of think about some of these announcements where again, you kind of link up with the health service entities, collect real-world evidence, kind of look at the impact of the test on health care utilization, success of kind of the patient outcomes? Is this kind of a good blueprint going forward in terms of what we should expect?

Yes. At this point, it is, I think -- and maybe for this year, it's a good model to think about for increasing adoption. And if I can speak for GRAIL, and I think they've mentioned this publicly, but they've been focused this year on really being targeted in terms of accessing different providers and giving them real-world experience with the test. What they don't want to do is really go too far, too fast, too broad and have providers struggle with the diagnostic odyssey and what happens after you administer the test and you have a patient that potentially tests positive and then how do you look at the next steps. So these types of collaborations are going to be really important, for instance, the Point32 one where GRAIL will work on having Galleri as a complement to recommended their cancer screenings. So it will give real-world evidence about that. By them being targeted and focused on the providers that they access, those 1,500 plus, but that will grow, obviously, this year, they can really work closely on educating providers in terms of what the next steps look like. So I think those are very important proxies or models that they're going to continue to adopt this year as they look to launch this more broadly over the course of the next 2, 3 years.

Okay. And then just on the regulatory side, I know there's been some news over the past couple of months. It seems like there's at least a dialogue going. Can you kind of update us on what you can in terms of where we are in the regulatory process?

Yes, sure. I mean I think most of the developments right now or not really developments, but most of the work that's being done is in the EU with EU being in Phase 2. Our expectation is that they give an opinion on Phase 2 and a final decision by Q2 at some point in Q2. It was supposed to be at the end of March, so end of Q1, but both parties decided to pause and extend that deadline because we have given some remedies to the EU that they are now -- they need to evaluate. So remedies around -- similar to the ones that we gave in the U.S., really not much different in terms of price guarantees, technology access guarantees, supply guarantees to existing customers -- to customers in Europe. So that's on one hand. Then there's also the jurisdiction case that was heard and we expect a decision in Q2 potentially on the jurisdiction case, which really is going to rule as to whether the EU had in the first place, jurisdiction to review this deal. So either one of those being positive, Patrick, means that we can go ahead and integrate this deal and operate effectively for all intents and purposes as 1 company. I mean they are consolidated with us now, but we're in a whole separate. If either one of those decisions is positive, we'll just integrate the asset. In the U.S., it's different. We're with the FTC and the administrative trial. We expect a decision in Q2 or Q3. And most likely, we'll go to the federal court. We'll appeal in federal court there, and we're going to be in court. There was no legal impediment to close in the U.S. So the work that's going to be done there is for the FTC to try at some point to unwind this transaction. But we will go to federal court. We'll have this heard potentially in court.

And how long do you think this process could go?

Well, I mean, with the -- in the U.S., we're probably looking at the next 2 years plus in terms of going through the courts, going to federal court. It could go all the way to the supreme court, Patrick, if -- depending on how it goes, I mean, obviously, each -- we think our chances are really, really strong in court because there's never been a vertical transaction that's been blocked by the courts. And so we believe that the legal arguments are on our side. But it could take a while as it goes through the federal court process, maybe even the supreme court. In the EU, it could be as early as Q2, if we get a favorable decision and then we integrate the deal. And if not, we'll probably go to court in the EU as well. And then we're looking at a similar timing.

Okay. I think we'll leave it there, Sam. This is a great overview. I appreciate your time as always, and I'm sure we'll talk soon.

My pleasure. Thank you, Patrick. Appreciate you having me.

Yes, take care.

Bye-bye.