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

Good day, ladies and gentlemen, and welcome to the Illumina Genomics Forum Investor Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Salli Schwartz, Vice President of Investor Relations. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us. Hopefully, you had an opportunity this morning to listen to our Illumina Genomic Forum Innovation road map session. Before I turn the call over to Francis, I will make a few opening remarks. 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 to Francis.

Hello, everyone. Thank you for joining us. As I'm sure many of you saw, this morning at the Illumina Genomics Forum, we unveiled a number of significant updates on our sequencing technology road map. We announced that Chemistry X, now named XLEAP-SBS Chemistry will be coming to market in a new product line, the NovaSeq X Series. NovaSeq X is the most innovative sequencing platform we have ever developed, providing massive improvements in throughput, scale, accuracy, simplicity and cost. It's also our most sustainable high-throughput sequencer ever, enabling greater access as big science becomes green science. To make this possible, we needed more than 5 years of development and more than 40 patent filings. The innovations of NovaSeq X enable us to deliver even greater sequencing breakthroughs in future phases of our road map. We prioritize not only utility but user experience, and customers noticed. Early response has been phenomenal, and we're already seeing strong preorders. In addition to this breakthrough sequencer, we also announced that in 2024, we will be offering XLEAP-SBS on our flagship benchtop platforms, NextSeq 1000 and 2000. We also shared that we will deliver 2 products with Illumina complete long reads in 2023, a long-read human genome assay will launch in Q1, delivering greater throughput at lower cost. With Illumina complete long reads, we are consistently generating contiguous long reads of 6K to 7K, with our longer read more than 30K. And in the second half of next year, we will deliver an order of magnitude improvement and throughput and with an enrichment panel. In addition, we announced the launch of NovaSeq 6000 Dx, which earlier this week completed registration as the first FDA-regulated and CE Marked high-throughput sequencer. I'm excited to continue to discuss these innovations with you. Joydeep Goswami and Alex Aravanis are here with me to answer questions, too. So operator, please go ahead.

[Operator Instructions] And we will take our first question from Dan Brennan with Cowen.

Congrats, everyone, obviously, on the launch and the years of effort that went into this. I guess I wanted to ask my question on demand elasticity. You're kind of pricing the XLEAP at $200 a genome, that's even more attractive than we would have thought. And certainly, we would expect customer interest would be strong. Could you just give us some color, Francis, about that price and how we think about demand elasticity across academia and clinical. And kind of with that, if you will, could you discuss the NovaSeq and kind of how that plays into the XLEAP, namely, will the Dx go to kind of small and midsized labs and you expect like larger labs will adopt the XLEAP? I'm just wondering on elasticity and kind of how you segment the clinical market, given I know during the prepared remarks, you discussed comments from campus that were very constructive on XLEAP.

Great. Well, thank you, Dan, for that question. We expect the NovaSeq X to drive the next wave of elasticity in both the clinical and research markets as you said. And some of the comments that I made during the talk helped ping that in a little bit. So specifically, for example, what we're hearing from research customers is that they're excited about the potential for the X to enable them to tackle complex diseases through much, much larger cohorts, specifically diseases like neurological conditions, Alzheimer's, Parkinson's, autism, schizophrenia, and also just too much deeper sequencing. And so X will open up the avenues for research into those areas. We're also hearing from some customers on the research side that they're going to use the X as the opportunity to move from offering exon services to offering genome services. And so that's a pretty significant step up in terms of the amount of sequencing that they would need per sample. And that's really only fundamentally enabled by the X. On the clinical side, what we're seeing is -- and you heard a little bit of that in the remarks this morning, too, we're seeing a number of trends sort of playing out. One, in oncology, we're seeing the move from panels to comprehensive genomic profiling, to clinical exomes. And that trend will be further accelerated by the X. We're also seeing, and you heard a little bit of that from the comments from Regeneron earlier, which is the move from exomes to genomes. And I think that will further expand the amount of sequencing needed per sample. And so we're seeing examples, as you point out, both from the clinical side and the research side, where what we're hearing from the market is that they'll do more sequencing in terms of larger cohorts. They'll do deeper sequencing. They will push more new modalities like spatial, for example, and single cell sequencing. And so we expect that, at any given customer with an X, that you'll see them do more sequencing after they moved to the X than they did before. And that's how it played out for us with the NovaSeq as well, the 6000 when we launched it. That after customers bought a NovaSeq, they ended up doing more sequenced -- spending more on sequencing in aggregate than they did before. And then to the NovaSeq Dx, the -- what we are -- where we're targeting with the NovaSeq Dx is the clinical applications that need a cleared box. So specifically, for example, oncology testing, where there are many markets around the world where the LDT option just does not exist in that you can only offer clinical tests by having a cleared product and end-to-end product. So both the workflow and the sequencer has to be cleared. And so the NovaSeq Dx will be fundamentally enabling, for example, 2 countries across Europe where that need a cleared box and a clear test to do things like comprehensive genomic profiling. And so you'll see applications like oncology testing. You'll see genetic disease testing and other high-throughput clinical applications now being made accessible to countries who wasn't accessible until they had a cleared high throughput box. In addition, in the U.S., what you'll see is an expansion of the number of labs that are able to offer those tests because there are a number of labs that are waiting for a clear workflow that they can stand up before they offer a test. And so you'll see the emergence of a more distributed environment for markets like oncology testing in the U.S. because of the availability of a cleared high-throughput box and a cleared assay on it.

And we will take our next question from Dan Arias with Stifel.

Francis, maybe just on the X system. When will it be broadly available? What is the ASP there? And then if I go back to the HiSeq X launch and your commercialization of the $1,000 genome, I remember you guys being helpful with an equation that kind of put some assumptions around reagent price per run, genomes per run and then sort of an upfront extraction sample prep assumption and a depreciation assumption that essentially helps us with understanding where the cost components come from for a $1,000 genome. I was hoping you can maybe do that for $200 genome.

Sure. So let me start with the availability. So the NovaSeq X Plus, we announced to both of them today, we will be shipping the NovaSeq X Plus in Q1 of next year, so late Q1. And we'll be ramping up production over the course of 2023. The NovaSeq X will ship in the second half of the year, and we'll also be ramping production up over the course of that year. So what you can expect is, as we've done with our other launches, we'll be -- we're taking orders. We started taking orders already. So we're taking orders now. We'll start shipping against those orders in Q1. So initially, we'll be building a backlog of orders. And then we will be working to ramp up production. And by the end of the year, on the X plus, on a run rate basis, we should be able to fulfill demand coming in. So that's how we're thinking about -- that's how we're looking to ship the products. In terms of pricing, the NovaSeq X Plus will be priced at $1.25 million for the machine and the NovaSeq X will be $985 for the machine.

Yes. No, I think that's right. That's the pricing, it's $985,000 for the NovaSeq X.

We'll take our next question from Julia Qin with JPMorgan.

Congrats on the new launches. So just kind of backward compatibility, what would the cost per gig look like on NextSeq? Should we be thinking about a similar threefold reduction or roughly $5 to $6 per gig? And then could you maybe talk about the rationale of choosing that early 2024 time frame for backward compatibly rather than any time sooner or later time of the year?

Sure. So thank you, Julia. The -- we haven't announced yet the pricing associated with Chemistry X or XLEAP-SBS on NovaSeq 1000, 2000. So stay tuned. As we work through that development process and gets closer to launch, we will be announcing the pricing. But you absolutely should expect improvements in pricing and also in the other aspects of the performance on NextSeq 1000, 2000. So on that part of the question, stay tuned. In terms of how we prioritized, so we needed to prioritize. We couldn't get built out at the same time. So we wanted to think through what the market need was. And we heard from the market very clearly was that there was a real need on the high throughput side around customers wanting to embark on much, much bigger experiments. And that they were gated by the accessibility of the price points to enable those big experiments I was talking about in neurological conditions, in cardiovascular and spatial and so on. And so -- the way we thought about it is sort of market back, which is what was the market need right now and where was the big opportunity. And there, we felt that it was clearly on the high throughput side of the market. And we felt the need to merge on the mid-throughput side, so there would be a need, but it would be a little bit further out. And that's how we made the decision around making the NovaSeq X first and then making it available on the 1000, 2000.

We will take our next question from Derik De Bruin with Bank of America.

So how should we think about the cost of goods and margins associated with this? I mean one would expect that your -- some of the packaging on stuff you're dealing is going to be over COGS, but also you've got more powerful cameras and stuff. So how should we think about margins, the gross margins on this? I guess what's your capacity in terms of being able to build the number of instruments for next year? I think that's one. And if you're not going to ship until the second half of '23, then how should we think about demand for the core business? Is it sort of like frees up your market for the rest of the installed base until people sort of see what's out there. Just some things help us think about the dynamics of this. I know I had a lot in.

Derik, no worries. All right. So let me start. First of all, we are shipping in Q1 of '23. So it's important to know that we're not waiting to the second half. That's for just the X ort the X Plus, which is the flagship one shifts in Q1, and we're taking orders right now. In terms of freezing the market, what we expect to happen and what we're hearing already from our customers is customers are running production environments, which our customers are. Whether they're on the clinical side or the research side, they're going to continue running with the machines they have for the majority of their production samples. They're going to acquire an X as quickly as they can to understand the profile, to get familiar with it, to validate workflows. And that it will be more of a tapered cutover. So even the most aggressive labs, the really -- the ones that push the envelope the most, are going to continue on NovaSeq 6000, at least until the back half of next year before the -- and then they're going to start sort of tapering over their fleet production loads. And so we expect people to continue to use their NovaSeqs, to buy their 6000s even as they look to ramp up on the X. In terms of margins, our philosophy has always been to put price points into the market. Once we have the innovation that allows us to -- allow us to maintain our margins, and so that's -- candidly, the work we've been doing over the last 5 years from a product development perspective, the innovation -- the breakthrough innovations that Alex talked about really enable us to drive our cost of goods sold down and then pass that to the market. And that's how we're able to deliver these price points, not only at a sustainable model, but in a way that's good for our margins and healthy for our margins. And so that's been our philosophy now for a very long time and continues to be our philosophy. In terms of capacity, we will be -- we are ramping up our manufacturing capacity now. As I said, we're taking orders now. We start shipping in Q1. We expect demand to exceed capacity for a while, so going into next year. But as we exit next year, we expect our manufacturing capacity to match our demand. And so we expect to be in that position as we exit next year. I think I covered all the parts of your question, if I missed anything.

I think you hit it, Francis. Maybe the only thing I'll add, Derik, in there is we have -- traditionally, every time we've introduced a new platform, we had trade-in promos and other combo promos that ease the cycle, right, as customers bring on new instruments or wait for new instruments that they don't have to choose between getting one immediately and continue to use the previous platform. So expect those to continue and smooth out the cycle, Derik.

Derik, I was just going to add a couple of points there. So one is we talked about our manufacturing facility. So we've insourced almost everything now on the flow cells, the consumables, the chemistry, and that allows us to control prices even more, right, and really be master of our own destiny is about scale. And because we have the scale, we can make those investments over time. So that will be -- that's also significant. And then I just want to emphasize, as Francis said, you can lower prices, but it's really around innovating so we can lower prices and do that with the great comparable margins to the past, right, and then pass that on. If you look at the flow cell that Francis had on stage, it's actually smaller than the existing 6000, but it has 3x the output. And so that's a very concrete example of innovation, right, going to the higher density, having the new chemistry, which allows us to do that and the optics and so on.

We will take our next question from Tejas Savant with Morgan Stanley.

And congrats on all the news flow this morning. Francis, a couple of questions for me. One on Chemistry X. Did you share how are you thinking about sort of the read length that you expect to generate here given the higher stability? And then on the Infinity piece, can you just help us contextualize what should be the price per genome once you launch that whole human genome assay in the first quarter? And how does that stack up versus the 1K or perhaps less than some of the native long-read approaches are targeting here? And finally, on the ambient shipping point, I feel like that's sort of underappreciated a little bit by the investment community. But could really help democratize adoption here. Walk us through how you're thinking about that.

Maybe I'll start with the Ambient point, and I'll turn it over to Alex, since I have him here for the other parts of your question, Tejas. So you're absolutely right on both fronts. The ambient is a deal that I think is -- is going to be underestimated for a little while in the sense that not needing dry ice or a cold chain for supply is a major step forward in a number of ways. One, even in the U.S. for existing customers, it is -- it's a big burden to have to deal with a shipment when it comes in. I don't know if you've ever been at the loading docks at these labs. So it's a big deal for them. They have a lot of people working on it, a lot of people sort of disposing of the dry ice. It's a time consumptive process. And so from an experience perspective and from a delivering superior value compared to anyone else, it's a big step forward. They don't need that anymore. Also, increasingly, we are hearing from our customers that they have their own sustainability agendas, whether it's SDP goal that they're trying to hit or just values associated with their organizations, that they really are pushing their vendors to continue to be more sustainable. And so I think this positions us very well in being aligned with the values of the organizations and the communities that we serve. And I think again, competitively, that's going to be appreciated by customers and potential customers. The other point you make is also very important, which is it opens up new markets. There are countries where you don't have a reliable cold chain and that has been a gating factor. And by not requiring it, we're suddenly enabling those countries now to get access to high-throughput sequencing. And so I think that's going to be a really exciting thing for customers that we have in some countries that have frankly struggled with it or, frankly, to not been able to bring high tube sequencing at all. So to your part, I think it's a big step. I think it's a little underappreciated, but it's an important step forward.

All right. So just on the ambient ship, I had 2 customers come up to me after the session in tears about how incredible they are, the ambient ship is and how much it means to their organization and how much it means that they won't have to be throwing all this stuff into landfills anymore. And again, I want to emphasize a technical point, which is it's impossible to do that with the old chemistry. So the chemistry that other people have copied and so on, it's just a physical and chemical impossibility. So I can't emphasize enough how hard that was to do and the just incredible customer feedback around that very differentiated capability. You asked about read lengths. So at launch, the read lengths will be 2x 150, which addresses the vast majority of customer needs today. We've been testing it in our laboratory and because of the stability, it has a lot of potential to go to longer absolutely on our road map to have future kits with longer read lengths, like we've done with some lower throughput systems, but really want to bring that to the higher throughput, which is even harder to do. So we haven't talked about that road map yet, but 100% committed to it and the chemistry is enabling for that. Regarding Infinity, Infinity at launch will be lower cost than any whole genome and any legacy kind of long-read technology. So we think they'll be attractive there. But it gets really attractive with the enrichment kit, right? So our standard PCR-free genome, right, especially on NovaSeq X, I mean, it's going to be -- is the highest performance now of any genome. And then adding to that, select targeted regions with Illumina complete long reads. I'll use the brand name now for just a fraction of the cost of having to do it on the whole genome, that combination price point will be dramatically lower than what we think any long-read technology could offer.

And we will take our next question from Puneet Souda with SBV Securities.

Francis, Alex, so first one is really on actual run time and turnaround time for the NovaSeq X Plus fully loaded I mean you mentioned 1 day. So I just wanted to make sure how that compares to the 40 hours or so for NovaSeq S4 run. And on the gross margin point, I mean, you have 90% reduction in packing, you have smaller flow cells, faster reads, lower volume at reagent. So actually, has the gross margin improved here at scale? Or is it the same given the cost per gigabase of $2 per gigabit? And then lastly, I have to say, quite an impressive conference that you have put together. I mean you really managed to get multiple genomics of stakeholders and multiple end markets under 1 roof, which is impossible to do at industry conferences. So again, great to see that. Should we expect this to be an annual event now?

Thank you, Puneet. Maybe I'll start with the last one and say, yes, thank you. We are honored and grateful and excited about how this conference is playing out. As we said, it got sold out. And so we had many more customers and partners that wanted to attend than we could even hold. So we're over 1,000 in person. We have, I think, over 10,000 online listening in to the innovation road map. So just a huge outpouring of interest from the community. You've heard me say for several years now that I want to launch products in front of customers and not maybe at investor conferences. And so for me, it's been a personal goal to create this community because I heard from our customers that there's a huge demand for it. In addition, the quality of the sessions are phenomenal. So we have a community here. There's a lot of knowledge sharing happening from payers, from health systems, from researchers around how to roll out sequencing at scale. So we've been very fortunate to have Ministers of Health, Head of Health Systems. And I have no doubt that we'll emerge from this conference with people having ways to accelerate the use of genomics, whether it's in clinical environments or in research environments. So with that, I'll turn it over to Alex on the other two.

All right. Thanks, Puneet. Regarding the run times, so let's go through it step by step. So with the initial 10 billion read flow cell, right, that's single day run. Now that compares to the highest output NovaSeq 6000 flow cells just in terms of raw output, which is 2 days. So it really is twice as fast with all the cost reductions with the DRAGEN onboard analysis. With the higher output flow cell, right, the 25 billion reflow cell, that's a 2-day run, right? So that's comparable to the current NovaSeq 6000, except you get 3x the output and obviously very significant cost reductions. And the -- all of the analysis on board and including some of the additional workflow automation. So kind of across the board, twice as fast compared to the same run times and then at triple the output, which there is nothing to compare to 2 days.

And on the gross margin, Puneet, I think as Alex had mentioned, right, we have innovated our technology to be able to create a new SES that allows us to reduce prices that customers are expecting. But we will maintain our overall company gross margins at the ranges that we have traditionally done. So that's probably the guidance out here.

And we will take our next question from Vijay Kumar with Evercore ISI.

Maybe Francis, my first one for you. I know price elasticity demand, that comes up a lot. With the price points that we're looking at now $200 per genome, is that available to all customers? Or do they need to be -- commit to a certain amount of volume? And just in general, talk about the demand picture, right, what the new system does. Because historically, when you had these systems come up, you've seen volumes go up. Where are those volumes coming from now? What kind of work have you guys done to understand that the market can support these price points?

Sure. So let me start with the price point itself. So as you know, in our instruments, customers can buy a range of flow cells with a range of output, and that gives them access to different price points. So there'll be customers that can get access to the $2 per G retail price, but there will be customers, who if they choose a lower output flow cell, will be paying more than $2 per G. And so there'll be a range there, and it will depend, customers will make the choice where on that spectrum they want to be, depending on the output per flow cell that they want. So this is available to them. Again, they can do lower output at a slightly higher price per G. We have spent a lot of time over the last -- it's been 5 years since we launched the NovaSeq 6000 and we spent a lot of time talking to our customers about the elasticity of their demand and what they were looking to do with the next range of samples would be and where the demand for sequencing could be. And what we've heard really loudly again is that there are entire areas of research that are waiting for a lower price point, so they can do the large experiments that they need in areas, again, like the neurological conditions, degenerative conditions, things like Alzheimer's Autism, schizophrenia, Parkinson's. We've also heard from a research perspective that there is a keen interest in going to spatial and more single cell to understand, for example, the heterogeneity of tumors. And again, to get to the scale they wanted, they were waiting for lower price points. Similarly, the -- on the clinical side, there was a keen interest to move to deeper sequencing. We have panel vendors that are looking to go to comprehensive genomic profiling. There are other vendors that are looking to go to clinical exomes and genomes. We have customers that have been using exomes for a while, but understand that there is more utility from genomes and have been waiting for a price point that which makes sense. Now it will still result in their spending more per sample or doing more -- obviously, doing a lot more sequencing for sample, too, but the price points now makes sense for them to consider that move. And so we spent years talking to our customers and assessing where the demand was. And so that's what drove the price points that we put out onto the market today.

We'll take our next question from David Westenberg with Piper Sandler.

And I know that there's kind of a little bit of a repeat from the other few. And I know price elasticity, just really is the topic we're getting a ton from investors. So I want to maybe like focus specifically on those high throughput filling up S/4 on NovaSeq kind of customers, the Guardant, the foundations, the [indiscernible] because it's becoming an increasingly gigantic portion of your overall portfolio. Can you talk about the expected road map in terms of spending? And let's just say, like a Guardant is like a $50 million customer. Is this one of those things where they're clinically seeking -- clinically sequencing the $50 million run rate, they buy the X. Their sequencing goes on while it's validating, and then they do a price reduction and then you expect it to grow off that base? Or is this one of the things where you expect those customers just to have to continued growth pathway and no kind of starts and stops in the way they're looking at the way that they spend. And then just really quickly on opening up new projects on the academic side. Do you -- have you been talking to any countries or health systems where a lower price of sequencing starts to open up the other $10 million kind of population price point or entire population of larger kind of customers. And I'll stop there.

Yes. Great questions on both. On the first one, we expect -- and what we're hearing from customers is that the path will look similar to what we saw before, which is, look, while there may be variances on individual customers, overall, what we saw before is that in aggregate, customers continue to grow their spend on sequencing even as they transition to a higher platform. So the way it played out was companies -- customers continue to run their production environments on their existing platforms. So in this case, for example, in NovaSeq 6000, then they would buy an X, they would start to use the X, validate their workflows, start to taper sequencing production from their existing instruments to the new instruments. But on the new instruments, for example, they could look to do deeper sequencing for sample and they'd use that transition opportunity as an opportunity to move from panels to exomes or exomes to genomes, and they would validate their overall -- their new workflows on the new sequencing paradigm that they're on. We saw that play out again as customers moved to the NovaSeq 6000, and that's what we're hearing. Similarly, on the research side, we expect customers to design bigger experiments and therefore, continue to expand their sequencing spend with us even as they get much, much more data for that sequencing spend. And so that's how we expect it to play out. Again, in the aggregate, there will be individual customers that it may not be quite that monotonic, but in aggregate, we expect it to play out that way. And then you're absolutely right. There are countries and health systems and applications that become accessible because of the lower price point. There are countries who say that, look, they'd love to do oncology testing, but it's not accessible to them at the price points that exist today, especially because in some countries, not all the personalized therapy drugs are available. And so they're saying, look, the utility isn't the same. If it was a lower price point, we'd absolutely do it. And then there are applications like newborn screening in some countries that are gaining traction, but require a price point along the lines of what's offered by an X for them to actually make sense in a health system. So those are a couple of examples of countries or applications and health systems that are now enabled.

Yes. And Dan, maybe just on the elasticity thing. There are 3 large buckets that Francis talked about, right? So we do expect that both because of price, but also technology and science moving forward here, we do expect growth in samples and continued growth in samples. So that's one. The second element is people are doing more assays on those samples per sample, right? So if you think about multiomics, you move from just looking at the DNA, they're looking at DNA and RNA or DNA, RNA plus protein. So even expansion there. And then the third element is because of the types of things you're doing on it, you're sequencing deeper, so it becomes higher intensity. So even per assay, you'd acquire more sequencing per assay. So the combination of those 3 elements, driven by price, but also driven by our innovations, really contributes to the overall elasticity of the market that we expect.

Yes. I'll just add, for example, a concrete example since you brought up Guardant, right? So their first gene panel for liquid biopsy was about 60 genes. So if you look at the product, they just launched the GuardantINFINITY assay, that's 800 genes. So it's gone up a lot, right? And part of the reason they're able to do that and develop new products and go to that kind of road map with the innovations like things like NovaSeq X. And we fully expect that -- and this is not specific to them, but they can now think about maybe that could become their standard assay in the future, right, or want to go to whole exome.

This concludes today's question-and-answer session. I'd like to turn the conference back to Salli Schwartz for any additional or closing remarks.

Thank you. We're so pleased to have you join us on this momentous stay not only for Illumina, but for genomics. A replay of this call will be available at investor.alumina.com. This concludes our call, and we look forward to seeing you at our Investor Day on Monday.

This concludes today's call. Thank you for your participation, and you may now disconnect.