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

All right. Thank you, everybody, for coming. Thank you, Illumina, for coming.

I'm just going to start off with some of the weakness in the stock yesterday. Some of the things I heard from investors was -- number one, some of the 5% reduction in workforce, if that came before or after -- or you knew about that before or after when you gave long-range guidance or and even guidance for next year. And then number 2 is on the debt rate. So you've talked about some of the refi and some of the dynamics around the refinancing and kick it off that way.

Yes. So look, our expectations on the long-range forecast that we gave or expectations that we gave have not changed, right? So we do expect that NGS and its ability to change how biology is done, both on the research side and the clinical side, remains unchanged. It's large -- very large markets that are growing and the penetration rate of NGS in these markets is still at its infancy. So lots of room to grow. And as you saw from the response to our technologies and our innovations, right, we are very confident in our ability to lead and sustain our leadership in these markets. So you brought up 2 things. So let me try to address both of those, right? So the first one is around the reduction in force that we announced earlier this month. So part of that was just a recognition of the macroeconomic headwinds that are currently with us, right, and an adjustment there to give us more flexibility and to provide us more ability to invest in core innovation and the customer-facing parts of our business as we go into next year and beyond, right? So it was a temporary correction, not a very significant one, but still something we wanted to be also careful about our commitment in the short term to both operating margins and of course in addition to the top line. So that's the way you should look at it. It's what you would expect any -- the management of any company to do, and that's what we went in. And of course, that part was we have made other tweaks as well. A lot of that came in the form of prioritizing our hiring, which I think we had mentioned in our Q3 earnings call, it's well right in to prioritize hiring into the parts of the portfolio that we have prioritized, especially those leading up to innovation around our key platforms and our key solutions that we are putting out in segments like oncology and genetic disease testing. And then also paying attention to our sustainable infrastructure in terms of being able to provide our products globally and serving customers being able to address their needs, et cetera. So those 2 areas were really our focused. And then, of course, we pulled back on G&A, we pulled back on travel, et cetera. I mean, these are very common things that companies pull on during these times. And I think, as I mentioned earlier, right, the reduction in force also focused on making sure that we retain and sustain our ability to continue to innovate and provide high-quality service to our customers at the end of the day, both research and clinical. So let me address your second topic, which is going to sound even more boring a little bit, which was the debt refinancing, right? And this is -- as is known, we have 2 tranches of debt that are coming due next year. We went ahead and refinanced those 2 tranches of debt yesterday, and it was -- the market conditions overall, given the last few months yesterday were quite favorable. So we went to the market and locked in. We had a really good response. The issue was oversubscribed. So we feel happy about it. And it takes away any risk in terms of debt refinancing next year, it just gives us financial flexibility. I want to reiterate, we -- we're a positive cash flow company, where we will continue to generate cash. So this is just about more financial flexibility as we head into the future years. And the debt was all short-term debt anyways.

I would add one point, when we were at earnings time, which was just earlier this month, we already had these discussions about the reduction in force as well as the financing well underway because there is nothing you can do overnight. So that was contemplated in the comments that we made during the earnings call.

Okay. Perfect. So let's actually move to one of the bigger topics and it is GRAIL. And now I fully -- I personally believe that you have enhanced the value of GRAIL and you can continue to enhance the value of GRAIL. I mean that it would be argued probably some of my buy-side counterparts. But saying that you can enhance the value and -- actually market conditions are going kind of in 2 different ways for cash-burning assets. So as we think about time lines to spinning off, you have 2 factors going, the enhancement of value that you can provide to GRAIL, but it's offset with the fact that you're burning cash. So with those 2 things in mind, I mean, how do you think about timing in terms of spinning off GRAIL. And this is, of course, under the assumption that EU continues its course that EU seems to be taking.

Yes. So lots of that question, right? So first, about the asset about GRAIL and where Illumina had contemplated in this original thesis to add value to GRAIL, right? So look, GRAIL has a unique asset. And for most part and actually for -- on all fronts, right, the uniqueness of the asset and the value of the asset has played out. So they did launch their gallery product on time. That continues to be from a clinical trials and testing perspective, the most complete clinical data set that is out there by far, right, in order of magnitude, in terms of number of patients they have analyzed. It is still the only multi-cancer early detection test that gives you results of over 50 cancers. Many of those don't have alternative screening technologies today as opposed to everything else that you've seen in the market being tried out for maybe one or maybe a handful of cancers at the most, right? And again, it's the only one that can pinpoint the location of the cancer, which is really important that we're going for a blood test. And I think the recent ESMO guidance actually provided some really good data in terms of the real-world evidence now that the test has been out in the market for a while. The real-world evidence actually matching that of the clinical trials, which is -- it seems like, of course, it should, but there are many tests that fail to provide that sort of evidence coming through. And lastly, I would say that the other concern with screening test was a little bit of how would patients react to it. Would they be okay with knowing they had a cancer or knowing that there is some level of false positive and false negative on the test. And the response from patients was overwhelmingly positive, right? So these are all things that were uncertainty with test like GRAIL, which have all been retired. And I think it's proven out our original thesis in terms of the value it can bring to patients and really to healthy individuals who are at risk of cancer and by detecting their cancer earlier, you can shift the curve of survival from cancer. So now the ways Illumina had looked at adding value to it was really to take GRAIL and to be able to expand its ability to get to health systems, to get to government health systems faster. And globally, right? GRAIL had no plans initially to expand beyond the U.S. And of course, that's where Illumina thesis and finally, also to be able to provide the test in a distributed format more easily. And again, because of the whole separate, we have really not gotten started on any of the thesis on scale addition, et cetera. But I think there are certain areas where their association with us has definitely helped. With respect to divestiture and cash burn. So first of all, the cash burn from GRAIL was anticipated in our investment thesis, right? So it isn't something that has caught us by surprise. We knew what it took to bring on a platform like GRAIL that for us, provided long-term value, long-term growth opportunities that very few other assets would have provided. So that -- none of that is a surprise. None of that was something that we didn't anticipate. I think in terms of your -- what we hadn't anticipated to be fair, was for a vertical acquisition or vertical asset like GRAIL, where that's not part of our core business, it's not in the same area that we would get opposition from the regulators, right? And so 2 parts to that. That was a surprise. I will say that. I think what you saw with the FTC administrative law judge decision is that from an economic theory and a legal theory, the FTC's own judge basically corroborated what we have been saying all along is this is pro competitive. There are no issues with anything around the deal, right? So put that to the side, but that is an important fact in terms of our approach to acquisitions and our approach to this particular acquisition. The European side is where what you brought up, David, part of that was we do expect that the European Commission will come back to us with guardrails or more details about what a potential divestment order could look like, right? And in that point, I will reiterate what we have said, believe in the thesis. We believe in the asset, but -- in the face of a divestment order, we will be pragmatic in our approach and proceed expeditiously if we have to divest in given the guardrails that the EC sets us. But this process will take time because it's not an overnight process, whatever divestment guardrails the EC gives us will take -- we expect at least 9 to 18 months at the least to go execute on it, right? So we'll plan, but I can't give you any more details on how that will be conducted right now because we don't have details on what the EC comes back to us with.

Got you. Currently in the market, there aren't really strong competitors yet selling instruments, like in commercialization phase. I mean like I think people will make an argument there are some good emerging players. But right now, they're not there yet. They could be next year, a year after that. Now as consumables has slowed down and companies have existing projects. So can you walk us through why consumables or why there's so much softness in the market right now, considering you haven't launched your new product yet? So they know there's only one place. They still need to buy NovaSeq consumables. So help us walk through that. And as kind of an add-on to that, before the original NovaSeq launch, you did see good consumable growth. And what's kind of maybe different now that was different than was then?

Yes. So I would differentiate between consumables revenue this year versus utilization at the customer level on our instruments, both high throughput and mid-throughput where most of this competitive noise has come on, right? So first of all, we can track consumer utilization very, very clearly because we -- about 60% to 70% of our high throughput or mid-throughput instruments in North America and Europe are connected, which means we can monitor activity on these instruments very closely. And we have seen that -- in general, the activity on these instruments, both on the research side and the clinical side, has not slowed down, right? So that's a good thing with 2 exceptions that we called out during our third quarter earnings call. One was around some of the large research/PopGen customers. They have told us that they've had some challenges in recruiting newer patients. So we did see a slowdown in activity, and that is temporary to the extent that these -- they are not changes in funding, they are not changes in intent. They have to rejigger their recruitment strategies, and they expect they will be back online in the coming months. And we've seen this before, right? We saw this at GEL where initially they had -- this was back in 2018. So right. They had some slowdowns. They changed how they recruited patients, and they went back and they completed their intent. So that's one area where there was some -- there was some slowdown or at least a reduction in the rate of activity. The other one that we did see was customers in Europe -- research customers in Europe there where -- there was a slight -- a downtick in their utilization. Again, that's not surprising and not something that others haven't seen as well. It -- when we speak to these customers, it is a bit on cautiousness on some of the macroeconomic headwinds. And they have seen a lot of inflation-related fees, which eats into their spending power a little bit more. So again, not surprising from our end. Again, it's not a structural change. Nothing is changing what they want to do and the importance of NGS to their overall piece. So I'll put that up. But barring that, right, clinical activity remains strong. Anything else to do with research has remained surprisingly strong as -- especially as customers move up to mid throughput, for example, to our NextSeq 1000, NextSeq 2000 areas. So I will -- this is activity. What you're seeing softness in is around purchases, right? So there are 2 things that have affected us this year. One is a little bit of inventory deleveraging. So as people look into uncertain economic times and the improvement in supply chains overall, they decided that some of the inventory levels they've had before they can afford to reduce them, so they burned through some of that, right? There are limits to how much that can be done. That's why we expect as we look forward into 2023, that we'll see that correct itself and purchases of consumables will more closely start tracking it. The other thing I will say, and you brought this up in the context of competition, we have continued to see very good uptake of our instruments. So of course, NovaSeq 6000s had a record first half of the year. And we have had very, very strong sales even in the face of all the announcements from mid-throughput players, very strong sales of our NextSeq 1000, NextSeq 2000 franchise, where it's [ around ] a 40% growth in Q3. And we continue to see very strong interest in that platform. So we are cautiously optimistic about once we get through these temporary macroeconomic headwinds, we'll see the utilization on these instruments that are being purchased pick up and go back to the trend line in consumables growth that we had seen earlier.

Got it. And then with the -- I mean, I think the investment thesis is evolving really quickly with a new instrument launch. So how should we think about your order book? Are you planning on giving updates on the order book as we transition, particularly because you did give guidance for next year that was below the 5-year guidance, I think it's pretty reasonable that, that would happen in the face of an instrument launch, but are you planning on giving us context in terms of that order book?

Yes, we will provide updates. So just again, what we did state in our earnings call, even just after a month, right, we had 50 confirmed orders and then 170 instruments in our pipeline, which is the latest stage pipeline where we have -- we've identified customers who have a dedicated budget and so they can't purchase the instrument and they have given us the timing of when that -- they want to have that instrument on their premises, right? So that's 170, that number -- and we have a much larger pipeline of people that have expressed interest, but we are going through validating and betting their ability to pay and exactly when they want the instrument. We will provide you updates, so that -- as you can imagine, the order book and the pipeline have continued to grow since then, we'll provide a next update at JPM. So please hold until then. But it continues to match our expectations, and we continue to see interest globally, right? So we come back to some of the features that have really enhanced both global interest and interest across our segments, both research and clinical.

Yes, it's actually a good segment. I mean, I think that we've always seen good elasticity in demand and academic, but you did mention on the last call that clinical customers are adopting X at a faster rate than you expected. When you're talking to these clinical customers, are they planning on building new assays, larger assays on NovaSeq X? Or are they just trying to get lower cost of goods sold by adopting X?

Yes. So it's been a pleasant surprise to see clinical customers kind of adopt X early, right? And so what they have told us and what they did have conversations with us on, is their existing pipeline of assays that have been validated on the 6000, they're going to continue. So you will expect to see expansion of their fleet on NovaSeq 6000 as they expand those -- the throughput of those assets. And that's purely because once you validate on a particular platform for clinical applications, you don't generally tend to change that very quickly. A lot of what they are excited on the X for is really around new assays, which do 2 things, right? One, sometimes they are looking to sequence at a higher depth for more sensitivity. And this becomes really important in applications like either cancer and things like MRD where you're looking for a very weak signal and literally like finding a needle in a haystack. Or you're looking for more breadth, so you're looking not just at single gene or a few genes, but you're looking across the genome and/or at multiple sites across the genome. So -- and in some cases, both, right? You could have things where you're looking at circulating tumor DNA, but you want to expand the aperture a little bit and look across a bigger part of the genome. So -- and you've seen this starting to happen, definitely oncology side, but also as you move into rare disease diagnosis, right, you want to have a wider lens. You want to go from small panels to larger panels, eventually looking at a clinical whole genome. So we are starting to see that -- those sorts of ideas kind of percolate with customers, both on the clinical side, but also clinical research. And I think you're going to see much more of that going forward as well.

Did you care to maybe give us -- I mean, you don't have to necessarily throw out the exact customers, but maybe some of the conceptualization of this. I mean -- is it like maybe you had an MRD company that was looking at a tumor-informed approach, and now they have higher throughput, so they're going to go with a tumor-agnostic approach or a company is shifting from wanting to go from whole exome to whole genome on their assay. I mean can you give any conceptualization to help us understand really how they're going to take this throughput and they're going to become bigger customers of Illumina.

Let me throw a couple of examples at you, right? So we definitely are seeing, especially on the MRD side, people that are moving from smaller, more focused panels to larger panels and eventually doing a clinical whole genome initially, right? So it would still be tumor informed, but the information that they capture with the first assay is much bigger, much wider. So that's one set of things. The other set of things is -- and Regeneron, we mentioned this in our Investor Day, right? So one of the quotes we got from them as they looked at the Xs, they had -- they always make out -- and every company does is where they stated it is, they do a cost-benefit analysis, right? So what does -- what do you get out of an exome, what does it cost you? And then at some point, they know that there's much more information at the genomic level. And as the amount of information and the utility of the information you get from an exome starts hitting a -- you're the top end of the X score, right, it makes sense to move to the genome. And at some point, it's a cost that says there's cost benefit to moving to now to a whole genome approach because the constant has come down in that range that it makes -- tends to now start investing in the genome, right? So we are in that level of movement if even a company like Regeneron starts thinking about now we want to move from whole exome to whole genome, right? It definitely signals a bit of a transition there. And we are seeing this. And then maybe the third thing I will mention is this is more in the population genomics side of things, but I think you can see parallels on the clinical side as well where people were initially just focused on just doing DNA. There's a lot more talk on saying, can we do a more complete multiomic assessment of the same sample, right? So can we look at DNA and in RNA, or you can do a DNA and the proteomic signature in the same sample. And can that lead to better clinical insights or better drug discovery -- drug and target discovery insights than doing just a genomic analysis could. So we're definitely starting to see those trends and customers coming back to us and saying, NovaSeq X enables this and enables this now.

We're really have time for maybe one question, probably a short answer here. But the year is 2027, you're back here at the Piper Sandler Healthcare Conference. You're talking about over the last 5 years, what are you most proud of that you accomplished over the last 5 years?

Wow, that's -- and you want a short answer for that. Okay. Look, I think there are 2 or 3 things I'll highlight, right? And this goes back to what I said earlier about us being really in the infancy of the power of NGS and what it can bring to biology. What NGS does is it allows you to answer biological questions at a greater depth and at scale. So our vision for 2027, if you will, and beyond, is really that there's a lot more science that starts bringing in NGS as the first element and the most essential element, right? So more kind of comprehensive biological and molecular testing of samples, both on the research side, right? But as the science starts developing, you start getting these assessments into the clinic. So you start getting into whole genome sequencing on every sample, right? And it's cost effective and the information is there. But also a whole multiomic analysis, right? So a transcriptomic analysis and a proteomic analysis become just standard of care, but also standard as a research toolbox as standard as peering into a sample what microscope is today. So that's our vision. I think we are actually quite close to getting to that vision with some of the technological advances that we and our partners have made, right, because there's advancements on the proteomics side, which are feeding and their advancements on some of the spatial single cell side that are absolutely feeding into getting more information, getting more insights into disease, into better health, into treatments with this. And of course, at the end of the day, our mission is to provide better access and better human health through genomics, right? And I think all these are pointing towards that, saving lives, getting to longer lifespans, longer, healthier lifespans through the use of NGS.

Thank you.

Thank you.

Thank you.