Q3 2020 Illumina Inc Earnings Call
Good day, ladies and gentlemen, and <unk>.
Come to the third quarter Twentytwenty alumina <unk> earnings conference call.
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I would now like to introduce your host for today's conference call Ms. Juliet Cunningham VP Illumina Investor Relations. Please go ahead.
Good afternoon, everyone and thanks for joining us for third quarter 2020 results conference call.
During the call today, we will review the financial results released after the close of market and offer commentary on our commercial activity after which we'll host a question and answer session. If.
If you've not had a chance to review the earnings release. It can be found in the Investor Relations section of our website at Illumina Dot com.
Participating for Illumina today will be Francis Desouza, President and Chief Executive Officer, and Samsung <unk> Chief Financial Officer.
Francis will share an update on our business and Sam will review our financial results.
Similar to last quarter, we are hosting our conference calls from a number of different locations. So please bear with us if there are any technical issues or positive.
This call is being recorded and the audio portion will be archived in the investor 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 risk and uncertainties back.
Actual events or results may differ materially from those projected or discussed.
All forward looking statements are based upon current available information.
And a woman that assumes no obligation to update these statements.
To better understand the risk 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 Illuminas. Most recent forms 10-Q and 10-K.
With that I'll turn the call over to Francis.
Thank you Julia.
Good afternoon, everyone and thank you for joining us today.
We saw a strong rebound in our business in the third quarter.
With a faster recovery than we expected in both our clinical and research customers.
Total revenue for the third quarter was $794 million up.
26% sequentially and down 12% compared to the prior year period.
Sure the third quarter highlights and Sam will provide more detailed financial.
Sequencing revenue grew 25% compared to the second quarter of 2020.
Sequencing consumables grew 29% sequentially with strength across our high mid and low throughput product portfolio.
Next week's momentum continued to build.
Admit throughput consumable is growing both sequentially and 3% year over year, and we expect continued growth in the fourth quarter.
Sequencing instruments also outperformed expectations with revenue up 24% sequentially.
This growth was primarily driven by increased shipments of note we seek a nextseq platforms.
No. It was he purchases have rebounded nicely from Q1, when some customers delayed purchases a shelter in place policies took effect.
We have been pleased with the sequential growth in Nova sea shipments and each quarter since Q1.
We're entering the fourth quarter with a strong Nova seek pipeline and expect the sequential growth to continue in Q4.
In addition, we had another successful quarter for our mid throughput portfolio would vote next week 2000, and Nextseq 550 exceeding our expectations.
Strong demand for these flexible sequencers led to record mill throughput shipments in the third quarter.
We're especially pleased with the success with the next week 2000 launch, reflecting positive customer feedback and demand.
Approximately one third of the next week 2000 placements are coming from new to Illumina customers.
Consistent with our expectations, we've seen little cannibalization at Nova Sea conversions, among the remaining crises customers.
Sequencing service and other revenue grew 9% sequentially and was 28% lower compared to the prior year due to onetime Ivy DEA licensing and development revenue of over $30 million in the third quarter of last year.
Total microarray revenue of $86 million was up 28% sequentially as direct to consumer customers and other applications began recovering from pandemic related headwinds.
Turning to our customer segments, we saw a solid improvement in both clinical and research activity.
I mean for both solid and liquid including testing for TMV.
We're also encouraged by the increasing availability and adoption for Ngf's base liquid biopsy tests.
The recent FDA approval for Garden, 360, and foundation, one liquid CTX demonstrates the clinical utility of these technologies that detect cell free DNA from the tumor in the blood and can provide comprehensive genomic profiling when tumor tissue is not available.
Liquid biopsy panels like these broaden access to more patients who can benefit from mgs in their cancer treatment.
Reproductive health showed strengthen the quarter growing sequentially and year over year.
In fact during the third quarter reproductive health averaged over 100% of its pre pandemic run right.
We expect sustained growth is reimbursement prospects have never looked more promising.
Recently, a cog updated its guidance to recommend that ni PTB made available to all pregnant women, regardless of maternal age our baseline risk.
This is a major milestone and we expect pairs to continue to follow a cogs guidance, adding to the already $130 million plus lives covered for average risk in the U S.
<unk> for example, recently aligned it's guidelines.
Adding average risk coverage to an additional 23 million lives in the U S.
<unk> is also the largest Medicaid managed care organization in the U S. Meaning this coverage decision will bring in it as an option to more medically underserved areas and populations.
And genetic disease testing physicians insurance companies and governments around the globe are increasingly adopting sequencing to diagnose children's suspected of having genetic conditions.
We're seeing solid progress on the reimbursement front.
Paradox in in the U S continues to grow with more than double the lives covered for whole genome sequencing than at the start of the year.
In Australia recently announced that it will reimburse whole exome or genome sequencing to identify the genetic cause of intellectual disabilities. These.
These positive developments give us confidence and sustained long term growth and this underpenetrated market.
Turning to research sequencing runs she'll continued improvement and increase from an average of 65% in the second quarter to 82% in the third quarter compared to it's free pandemic run volumes.
We're encouraged to see researchers returning to their labs, and reopening and this level of improvement exceeded our expectations.
Within research, we're seeing the role of Ngf's take shape and infectious disease.
We believe the most likely near term use case for sequencing as in research and surveillance for projects like Australia's first national COVID-19 tracking system, which games to sequence. The virus genomes of all positive COVID-19 tests in Australia and track COVID-19, using genomics across the country.
NIH is also increasing its funding for understanding COVID-19, and the transmission pathway using genomic testing.
We continue to believe COVID-19 testing will be primarily serve by PCR, an antigen tests with ngf's, providing supplemental testing capacity.
As such we're not factoring into material contribution to revenue in the fourth quarter from COVID-19 testing.
On the population genomics front, we're seeing promising signs of progress.
All of US received its ITE approval from the FDA in the second quarter and as expected Sambol started to slow from the biobank to partner genome centers.
We expect the project to ramp in the fourth quarter and into 2021.
During the third quarter sequencing for the UK Biobank continued and we expect levels to gradually returned to normal and sequencing to continue into 2021.
And we expect whole genome sequencing services for the NHS genomic medicine service to commence later this quarter <unk>.
Given the NHS is current focus on Covid, we expect this program to gradually ramped over the next few quarters.
Perhaps one of the most resilient pop Jen programs in the face of the pandemic has been the million veteran program or MVP.
The project aims to provide insights on how genetics lifestyle and military exposures affect health and illness and has recently expanded it's targeted enrollment from 1 million to 2 million veterans.
The U S Department of Veterans Affairs through it's sequencing partner personalities expects to cross the 100000 whole genome milestone before the end of the year.
We believe these and other initiatives will expand our markets and create exciting new opportunities for alumina we.
We are committed to continuing to lead through innovation with new product launches to support the markets and customers, we serve including Nova six 6000 version, one dot five reagents, which were launched during the third quarter.
This release offers increase shelf life improved quality scores longer indices and most importantly, it makes a 600 dollar genome more broadly available to help smaller labs be successful and provides additional incentives for labs to upgrade from high seeks to Nova sic.
<unk> 6000 version one dot five reagents have been extremely well received by our customers.
For example, the Princess Maxima Center, the largest national pediatric oncology center in Europe was outsourcing its genome sequencing to a collaborator but with the new reagents. They were able to purchase in Nova seek and can now start to perform testing in house, meaning potentially care altering genomic information will reach children with <unk>.
Answer faster and performed closer to the patient.
The longer read lengths combined with high throughput scale enabled a Canadian biotech company to adopt the Nova six 6000 for the development of antibody products for potential COVID-19 therapy.
We're preparing to launch next week 1000. This quarter next week 1000 enables lower throughput customers to adopt our newest platform as an entry point with the ability to field upgrade the next week 2000.
We're also launching the <unk> flow sell this quarter early access be three customers, including academic core labs are already using the flow cell for routine sequencing methods and mid sized research projects to enable faster turnaround times.
Other customers are using P. Three to develop workflows and single cell epigenetics and special transcript tomex.
These are examples of how we continue to execute on our current and future plans throughout these challenging times to advance our mission and create long term shareholder value.
Now I'll have the call over to Sam to discuss the third quarter financials.
Thanks for instance.
As discussed third quarter of 2020 revenue was $794 million at.
At 12% decline year over year, but 26% increase compared to the second quarter of 2020.
While the global pandemic continue to impact our business, we saw encouraging signs of recovery within both clinical and research customers.
Sequencing consumables revenue, a $500 million was up 29% sequentially and down 5% compared to the prior year period.
Quarter over quarter growth of $113 million reflected significant improvement across high mid and low throughput platforms.
With Nova seek full through returning to over 1 million for system per year.
Our mid throughput sequencing consumables grew in the quarter versus the same period last year.
Total sequencing system revenue of $109 million will go ahead of our expectations with both Nova seek and our mid throughput platforms exceeding our expectations at the start of the quarter.
The third quarter was also a record quarter for mid throughput shipments driven by customer demand for next week 2000, and the next week $5 50 Dx platform.
In fact next week Dx shipments represented over 40% of next week 550 shipments year to date.
Since 2013 alumina has shipped over 1000, Dx instruments, reflecting the growing clinical nature of our customer base.
Sequencing service and other revenue of $99 million was lower compared to the third quarter of 2019.
Total sequencing revenue was $708 million and represented 89% of total revenue.
Finally, total microarray revenue of $86 million was down 16% from the third quarter of 2019.
Reflecting lower consumables and services revenue, primarily driven by COVID-19 related headwinds.
Turning to the regions America's revenue of $436 million was ahead of expectations and grew over $100 million or 30% compared to the second quarter of 2020.
Sequential growth was driven by both research and clinical customers has lapsed continued to reopen and clinical activity increased in fact clinical sequencing consumables grew modestly compared to the prior year period as demand started to recover after delays and testing in the second quarter.
EMEA revenue of $213 million was up $45 million compared to the second quarter of 2020.
With strength and sequencing consumables, which grew compared to the third quarter of 2019, driven by a strong rebound in both clinical and research customers.
China revenue grew sequentially to $83 million driven by strengthen instrument placements.
AP J revenue was roughly flat year over year at $62 million and increased $11 million compared to the second quarter of 2020.
With an IPC, helping to lead the recovery with sequential and year over year growth.
Moving through the P&L I will highlight non-GAAP results that includes stock based compensation.
I encourage you to review the gap reconciliation of these non-GAAP measures, which can be found in today's release and the supplementary data available on our website.
Please note that all subsequent references the net income and earnings per share refer to the results attributable to alumina shareholders.
Non-GAAP gross margin of 67, 4% was lower as expected on both a year over year and sequential basis.
The year over year decline was driven by IBD partnership revenue in the third quarter of 2019, not repeating this year.
And lower volume and higher freight costs associated with the pandemic.
Non-GAAP operating expenses of $365 million were higher compared to the second quarter of 2020, and the same quarter last year.
Sequential growth was driven as expected by an increase in R&D project spend and higher compensation expenses.
Compared to the third quarter of 2019 operating expenses were higher primarily due to compensation related expenses and increased project spend.
Or should we offset by decreased travel.
Non-GAAP operating margin was 21, 4% up from 15.8% last quarter.
The non-GAAP tax rate of 14.8% was lower compared to last quarter and prior year due to discrete tax benefits related to prior year return adjustments and release of tax reserves.
For the third quarter of 2020, GAAP net income was $179 million or $1.21 per diluted share and non-GAAP net income was $150 million or one dollar two per diluted share.
Other income with the main driver for the difference between gap and non-GAAP net income due to net gains for mark to market adjustments on our strategic investments primarily from our marketable equity securities.
Additionally, in the third quarter cash flow from operations was $153 million cash.
Capital expenditures were $48 million in free cash flow was $105 million.
DSO, a 53 days compared to 55 days last quarter in part due to increased collections.
We repurchased $125 million of common stock in the third quarter with $295 million remaining for repurchase under our current plants.
We ended the quarter with approximately three $3 billion in cash cash equivalents and short term investments.
Are weighted average diluted share count for the quarter was approximately $148 million.
As we continue to navigate this pandemic there are still uncertainties around the virus resurgence in greater of recovery and therefore, we will not provide guidance for the remainder of the year.
Additionally, we are closely monitoring developments in the pandemic given the risk of new shutdowns in the U S and Europe.
And the fourth quarter, we expect the sequencing run volumes will continue to improve modestly for clinical and research customers from the 96% and 82% levels, respectively in the third quarter.
Again, we caution that this does not directly correlate to revenue, but data from the third quarter suggest customers are steadily returning to their lives, which will lead to increased activity.
Consistent with the third quarter, we expect fourthquarter sequential growth across all regions with China in AP, J, showing flato modest growth year over year.
For the fourth quarter of 2020, we currently expect continued sequential improvement in revenue, resulting from sequencing consumables being up modestly on a sequential basis as clinical and research activity continues to gradually improve.
Sequencing instruments, increasing sequentially and the fourth quarter is expected to be the strongest quarter of the year for instrument placements.
Sequencing service and other flat sequentially and micro arrays up modestly on a sequential basis as we continue to see a gradual recovery and direct to consumer and Gina typing applications.
For the rest of the P&L, we expect sequential decline in non-GAAP gross margin in part driven by product mix with higher contribution from instrument sales.
Sequential increase in non-GAAP operating expenses, primarily driven by R&D project related expenses compensation related expenses and an extra week in the fourth quarter compared to the prior quarter and prior year.
Non-GAAP EPS to be roughly flat compared to the third quarter of 2020, reflecting revenue improvement offset by lower gross margins and the sequential increase in operating and tax expenses.
With that I'll have to call back over to France's for some closing remarks.
Thanks Sam.
As the global leader for sequencing platforms and consumables, we've seen our products enabled groundbreaking research programs and transformative clinical tests that have the potential to shift the paradigm in patient care.
One of the largest opportunities for patient impact and revenue potential for years to come is the ability for mgs to detect cancer early.
Last month, we announced the definitive agreement to acquire Grill, and we expect the acquisition to close in the second half of 2021.
We believe our planned acquisition of Grail will accelerate a new era of early cancer detection transforming cancer survivability and opening up the largest clinical application of genomics we've seen.
We look forward to welcoming our grail colleagues to alumina when the acquisition closes.
Upon clothes, we expect to operate grill as a division within aluminum.
We remain committed to supporting all of Aluminous customers and ensuring that innovators, who wish to develop ngf's based tests have continued access to our technologies.
To conclude the recovery of our business accelerated in the third quarter with significant sequencing consumables revenue growth compared to the second quarter of 2020, and we expect continued consumables growth in the fourth quarter.
Importantly, we're also making good progress incorporating genomics into the standard of care and oncology therapies selection niet and genetic disease testing.
And most importantly, we believe that we're laying a strong foundation for Aluminous near and long term growth.
With that we'll open the call up to Q&A.
Thank you, ladies and gentlemen at this time I would like to remind everyone that in order to ask a question. Please press star within the number one on your telephone keypad.
Will pass for just a moment ticket policy Q&A roster.
Your first question comes from the line of Doug Schenkel with Cowan Your line is open.
Good afternoon guidance. Thank you for taking the questions.
The quarter was clearly better than most expected.
I think.
Even better than you guys, probably thought and a lot of instances.
I'm just wondering if you have a sense for how much of this was catch up versus reflecting a new base to build off of moving forward.
Based on your prepared remarks on queue for both both your spam as well as yours Frances It does seem like.
Kind of a few days to build off of given the momentum you've described heading into the queue for is that is that fair.
Hi, Doug, Yes, I think that's fair if we look at how this quarter played out it certainly played out better than we expected based on how the first few weeks of the quarter. We're looking.
So what we solve the course of the quarter was an acceleration in the recovery.
In terms of the sequencing activity in both are clinical and research customers.
And so as we exited the quarter I think we're at a new baseline.
That we will keep going into the queue for so I think it's fair to say that the recovery accelerated to create a new baseline for us going forward.
Your next question comes from the line of Tyco Peterson with J P. Morgan Your line is open.
Hey, thanks.
Trying to hit on two things just the elasticity on the consumable pricing cut.
Highlighted couple of examples Frances of customers that have come forward on the on the 600 dollar genome and use it as a reason to buy Nova sic, but I'm just curious as we think ahead and in the next year, how much incremental demand do you think that will drive it to what degree will catalyze some of the projects that you hoped it would.
And then on the instrument side instruments, we're still down 23% I'm. Just wondering if you could comment a little bit on when you think they're they're really going to get back to back to growth.
Yeah sure. So let me take both of those questions. So first around the elasticity point.
Associated with the launch of version one dot five reagents. So what version one at five aimed to do and we saw the effect in the quarter was really catalyzed some of the smaller Corps labs bye.
By giving them access to the 600 dollar genome the larger labs already had access to the 600 dollar genome. So this was really a release targeted at the smaller Corps labs and the intent is to do two things one to unlock the elasticity in that part of the market and so we saw customers that we're thinking about bigger projects we saw cussed.
<unk> that are moving to in source and I talked about an example of that in the prepared remarks.
The other thing that the this release was intended to do was catalyzed and upgrade cycle in that segment of the market. The smaller corps lives and so.
We started to see examples of customers that were either an older instruments or didn't have so that could be an hiseq for example, or they didn't have sequences and.
Because of this release they were able to buy a notice seek both of those dynamics. So catalyzing the elasticity of demand in terms of bigger projects as well as driving an upgrade cycle or dynamics, we expect to continue to play out into Q4 and going into next year.
Typically when we release, a new price point into the market a lower price point. Initially there is a bit of a headwind in this case, though we expect it to be very short and that's how it's playing out were very quickly we're starting to see both of those positive dynamics start to plant.
The second question, you talked about who was around instruments and maybe I'll start in Sam you can you can add to it.
I talked a little bit in the prepared remarks that we saw really good activity from an instrument perspective, we were really pleased that throughout the course of the year Q2, we saw an increase in Nova sic shipments compared to Q1 Q3 was bigger than Q too and so we continued to see growth in Nova sic shipments plowed over the course of this year from.
The base of Q1, and we saw strong demand in the mid throughput instruments to maybe Sam I will turn it over to you to provide more color yeah I would say in fact, we've been pleased with the sequencing instrument performance both in Q3 and the resilience that we've seen through the pandemic you would expect that there would be a year over year decline specialty given the pandemic given some.
No pause an instrument purchases, but as we look towards queue for we're expecting growth and instruments are strongest quarter of the year, we're expecting growth in terms of Nova sic sequentially as well.
And when I say growth in queue for I mean sequentially in terms of instrument.
Revenues and then the pipeline looks really strong for both next year 2000 and for an overseas.
Your next question comes from the mind of Derek to Berlin with Bank of America. Your line is open.
Hi, good afternoon.
Couple of questions. Thank the first one obviously, there's been a big ramp in the operating expense in the second half of the year as we think about.
Going forward is this something we should think about rowing into <unk>.
21, but even higher as some of the candy comes back into my travel comes back in and I guess I am a fault of negative question.
The.
Space can you give us a sense of how many women that were covered under high risk actually.
We're.
Actually we're taking advantage I mean the women.
The women that were eligible for doing high risk how many actually went into an ivy to testing and the reason why ashes I'm just trying to get a sense of what the penetration would be for average risk miniature sort of expanding coverage just trying to get some feel for the dynamics and how we can think about the <unk> business expanding thank you.
Yes, maybe I'll start and then Sam can add some some color too.
In terms of operating expenses, the our philosophy over the course of the year has been.
To to review, our operating expenses very closely and one of the things we wanted to make sure that we continue to protect the Ah high.
Hi, already things that we were working on so that includes our rich innovation pipeline and so we've protected our projects associated with upcoming products as well as some long term investments in the business. So we've protected those but we've looked for other areas, where we could make savings some of those sort of naturally played out over the course of the pandemic and the.
A form of reduced travel for example, and some of those you are right will come back next year, and so semel comments, a little bit more about that in terms of NPT. Obviously, it's a very regional story, but in the U S. For example, you have a.
A reasonably good penetration in terms of the women who are eligible for NPT going to get it so the majority of women.
Who are eligible for the test do get it as part of their pregnancy and so the opening up of that market and the average risks segment does represent meaningful upside in terms of the actual demand for the tests.
Yeah, Derek with regards to Opex I would add just maybe a couple of points and thanks for the question by the way.
The one thing I would say as we've been incredibly focused and diligent in terms of managing our operating expenses, but at the same time really focus to for instance, this point about not in any way undercutting our innovation.
And then our investment and innovation and.
In any way impacting our R&D pipeline, but for three quarters of the year up until the end of Q3 I would say we are about 150 million below our own internal bug.
Budget in terms of operating expense. So we have we have been very careful in terms of managing operating expenses were about 10% below and as we look forward, yes, there will be something that start to wrap back up things like.
Again as employees come into the labs, we will have R&D projects start to scale back up that will continue into next year and we'll have.
Certain expenses as hopefully this pandemic eases like travel.
That increase as well, but I would say in general we've been extremely diligent and disciplined in terms of managing our expenses through year to date.
Your next question comes from the line of two neat tsuda with S. P. D. Leerink Your line is open.
Hi.
Thanks and.
Thanks for.
Providing comments on for <unk> as well I appreciate that.
First question recently, just this in the last 24 hours, we have seen lockdown in France, and Europe, and these lockdowns can potentially spread.
Just wondering is that contemplated and your expectations for the fourth quarter.
And also do you expect.
Customers in Europe to be more adept at this time around in terms of managing research and diagnostic sequencing operations now versus before I just wanted to get your thoughts on that Glen given that.
Sequencing run rates, which you described earlier is 96% of pre pandemic levels.
Could we see a different standard here and is this victim juror guidance and then if your second question if I could ask around grill, one of the key questions that has emerged last week. Since this week actually is the approach that uhm alumina took two grills acquisition and light light of another multi cancer liquid biopsy.
<unk> this week.
I totally recognize that the acquisitions are pre revenue, but it appears the grill is is valued significantly higher versus drive. So could you elaborate if there is anything in terms of the overall market opportunity of the <unk> pen cancer test or technical performance of the gallery or scale of studies or anything here that.
It gives you a greater confidence in a higher valuation appreciate it.
Yeah. Thanks for <unk>, So I will start with your question around the potential restrictions in Europe, maybe even the U S. As we mentioned on the prepared remarks were monitoring that closely obviously, we all want to see the pandemic get under control, but there are definitely some some signs in Europe that there are there are.
Some potential shutdowns, taking place at least additional restrictions and so for Q4, we're monitoring that closely we factored that in as we look forward and.
Terms of R.
Our expectations for Q4 in fact, we said clinical sequencing activity in Q3 was 96% of pre pandemic levels research was 82% of pre pandemic level. Then we expect both of those to improve modestly.
Actually because of the fact that we're really tracking kind of how this pandemic involved in queue for not to improve more than that.
With regards to your other point of our customers being more of that I do think they are getting a bit more in depth in terms of learning to to work and live with the with the virus not to say that they're not obviously very careful and cautious about that.
But at the same time when you look at for instance, the number of labs that are now based on our queue. Three data that are either completely open or any sort of some level of operation. It's about 90% of the labs compared to about 50% back in April so that doesn't mean that they're 90% is all.
Full systems ahead, and they're all open but there are either fully open or and restricted operations. It's about 90% of the total labs globally. So they are really gradually ratcheting back up but on a cautious way and that's what factored into our expectations.
<unk>, if I could comment on your Grail question, we we've talked about the fact that.
Early detection of cancer represents by far the largest clinical application of genomics, we're likely to see over the next decade or two.
And we've also talked about the fact that we expect many players in this market because it is such a large such a large opportunity and we expect letters to take different approaches whether it's single cancer versus multi cancer or different technological approaches and certainly we have a number of customers, including thrives exact.
But also frenum and garden and other liquid biopsy players like Foundation medicine.
That we expect to play a role in this market going forward and we will continue to support all of those customers going forward what attracted us to grill was it's unique position in that market in terms of being the closest to having a commercial test and in terms of having the performance characteristics consistent with being closest to having a commercial.
So great is looking to launch its test next year and that will likely make them. The first player into the market. They have also undertaken by far some of the largest clinical studies in that space and so they have over 100000 people enrolled in the studies that they've done and generated quite a remarkable bonuses of data.
Associated with their test and then the performance characteristics of their tests are very strong so for the 12th deadliest cancers. They have a sensitivity in the high sixties percent with a false positive late or less than 1% were truly does represent a best in class product at this time in the market while we also.
Like two is that they are the only player at this point that has FDA approval.
In terms of being able to run and I-i study to return results to patients and so they are working with some of the Premier Ah healthcare systems, including the Mayo Clinic, Cleveland, Oregon Health system.
The Intermountain health system, Dana Farber, Sutter health and so they already have their gallery test in the hands of doctors returning results to patients as part of this study and so having that SDA approval was also very attractive isn't and all of that obviously factored into the price associated with ground.
Your next question comes from the line of Dan areas with Stifel. Your line is open.
Afternoon, guys. Thank you Frances on me all of our samples that should begin to flow. This quarter is there are material consumables assumption that's built into that work for four Q and assuming that things do get going there are you thinking that that should be all sequencing or might there be some geno typing that makes it into the mix there.
And then if I could ask a quick follow on it sounds like you're thinking modest growth in China is in the picture for Fork you did you say you over a year.
That would be a sequential step up there that we haven't seen in awhile. So what's what's driving the confidence in a move I guess back up to the mid $90 million range. Thanks.
Yes, let's start with all of us so for all of US we do expect the all of US samples to start flowing to partner genome centers in queue for and to start to see both sequencing and Gino typing activity from our perspective, the actual revenue contribution in queue for we're expecting is modest but.
It's a very important step because it then sets us up well for all of us to ramp up more meaningfully going into next year and so it means that the actual spot that set off the workflows been been setup and the machine is going if you like and so again modest contribution in queue for but that's a big step in such as up we believe well.
Going into next year.
And then some maybe you can talk about China yeah.
Yes. So then thanks for the question first of all with regards to China were expecting I would say flattish year over year performance in queue for so we sat on the prepared remarks for China in AP J flat to slightly increasing so for China, specifically, it's flattish performance year over year in fact, China.
Clinical performance has been strong year to date.
And growing year over year research as we've talked about on previous calls has been impacted definitely by the pandemic repurposing some of the work towards PCR testing.
And just the general impact of that on research, but we're pleased with the clinical performance that we've had in China Q3 had strong instrument placements as well in China, which bodes well for future activity and so pleased with the clinical performance there for sure and that's what gives us confidence.
Your next question comes from the line of Chaos Savant with Morgan Stanley. Your line is open.
Hey, guys. Thanks for the time here so.
So a couple of questions for you Frances and Sam So on the sequencing consumables line you have some destocking in the second quarter did did some sort of a restocking dynamic here play into that 29% quarter over quarter grows a doll.
And then an oncology uhm, how are you thinking about sort of of bullets yard in the fourth quarter and the first half of 21 as as in the mist screenings come back online.
Yeah, Thanks to Jeff.
With regards to stocking levels and restocking, yes. In Q2, we had we had some customers that destock specifically in <unk>. So that was an impact on our performance in queue to we have not seen from our data that there's been an increase in inventories of restocking back in Q3, so essentially.
We've seen and we've really looked at this with a lot of our customers. We've seen that customers are really purchasing to the demand that they have but have not restocked back some of the destocking that occurred in Q2, nor are we expecting in queue for that there is restocking either that they're going to continue based on the activity levels that we track and.
And relating that back with revenues, we can see that essentially they're buying to their demands.
And then yeah.
Yeah look at oncology I mean, I think you bring up a really important point I think one of the the tragedies associated with the pandemic is that there are people, who frankly orange going in to get screened for cancer and so they were walking out with with cancer developing I think there are sort of two dynamics that will play out one is.
There will be at some point to catch up right. Unfortunately for those of those individuals. It means Ah cancer has progressed, but whether that plays out in queue for our next year, there will be a catch up associated with people who haven't had their diagnosis. Yet. In addition, the other dynamic that's playing out is we're seeing that.
Blood based tests are actually doing better through the course of the pandemic. So if we look at how the market is playing out the service providers that offer blood based tests have a have proved that their business is more resilient through the pandemic then the service providers that do tissue based analysis and so I think one of the things that.
Playing out through the course of the pandemic is you're starting to see an acceleration of blood as a sample type for cancer testing, so you're seeing an acceleration in the growth of liquid biopsies, which we think is a durable dynamic and it's not just as a result of the pandemic, but we think that will continue to play out in the coming years.
Your next question comes from the line of Z J Coomer with Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question I guess two quick ones one.
Maybe I misheard this but.
Fail.
<unk> has done a second half of next year.
And I'm I'm curious, how we should be thinking about investments here.
And then when you think about the system placements here.
Given this displays a razor blade model, maybe perhaps elaborate on how how the lower systems. This year should go lay out next year.
I do realize the comps for consumables are easier.
Should that offset the the system declines with this year.
I'm curious.
Yes, let me touch on both and then Sam can add some color.
If we so on grill, yes, we are expecting the deal to close in the second half of 2021 as we go through the regulatory process.
We've talked a little bit about the dilution associated with grill.
But frankly, we will have more information for you as the deal closes and again, that's the second half of 2021.
In terms of the instrument placements.
Obviously, you're right. It is a razor razorblade model and that's why it's important.
Why we're so encouraged by the recovery, we're seeing and instruments placements. After we got out of Q1, and so the strength in Nova sic placements, two Q2, Q3, and certainly the pipeline as we walk into the queue for is a very is very important similarly, the strength that we're seeing in the mid throughput part of the portfolio specifically neck.
<unk>, both the new next week 2000, as well as the 500, the Dx boxes are a good sign for us as we look going into next year.
Your next question comes to the line of Catherine Schulten with Bird Your line is open.
Hi, Thanks for the questions and if a two parter on on the ground and what's the timing next year in terms of when we can expect to see data from past <unk>.
Specter any performance degradation as you move into an all come a screening population for that study and then second for the strive study I believe ground completed enrollment in late 2018 and was falling patience for 30 months. So is that something that we could see a readout at some point next year or is it likely end of 2022.
Yeah. So let me talk about the the Grill studies the.
The answers we don't expect the Pathfinders study to provide substantially different performance data than we have seen so far and the reason for that is that Grail has done a number of other large scale studies. So the CGA study had 15000 people enrolled in the study the second phase of that study.
As a prospective study and all comers study and.
So given the size of the studies they've done the with the same test.
The the performances they've published externally as based on statistically significant data and so we didn't expect the pathfinder data to reveal anything different and in fact before we signed the deal we had a small group of people.
Look at some of the early results the midterm results associated with Pathfinder and.
We won't talk broadly about it they are generally consistent with what we expected and so we don't expect.
The final study.
Study results get published next year them to be significantly different from the performance characteristics that you've seen so far.
What was the second part of that question.
With strive Frances.
Yeah, so strive as a prospective study it's 100000 women and it was fully enrolled about 18 months ago. So it's again pretty far down it's fast and again similarity given the size of the studies that have gone before we expect this to be further validation in terms of the performance characteristics and not significantly different.
Your next question comes from the line of Patrick Donald with City. Your line is open.
Great. Thanks, guys, maybe just one on the pop seek side, it's encouraging to see some of those bigger projects gaining momentum to get flowing here in the near term obviously the timelines of slipped a few times now you can you just talk to your confidence on these taking off on time, I guess with a new for two timelines, particularly all of us.
And are the trajectory similar to kind of what you've talked about before all of US for example at the beginning of the year you kind of talk about 60000 whole genomes in the first six months or are we still thinking with the the trajectories are the same once you do get launched thank you.
Yeah. That's a good question and as we look at where we are with those population studies now I'll touch on sort of the four big ones right. The UK biobank the million veterans all of us and the UK NHS and where we are now is that walking into next year. The majority of them have already been stood up.
Up and it's a matter of just either getting back to where they were which is for example, the UK biobank or just ramping up volumes of samples that's a much better place to be than we were last year. For example, where all of us still had to get FDA approval.
And then work out the workflows to get the samples flowing to its partner genome centers and so if I look at all of them. The UK biobank it actually they entered the year.
Sequencing at.
Hi capacity they pulled back in March because of the pandemic and they're starting to ramp back up going into next year and so assuming.
Assuming conditions are good we have high confidence in their ability to ramp up quickly.
We talked about the fact that the Midland the million Veterans program has been remarkably resilient over the course of the year and in fact has increased its scope over the course of this year all of US. We took samples are flowing in queue for and so really it is all about just scaling up next year, which is which was a pretty good place to be in terms of actually getting it going.
And then the UK NHS for this year has been on hold primarily as the has the NHS has been dealing with the pandemic testing that they're doing but they are expected also just start sequencing later this quarter and so that puts us we believe in a good position to start to see the scaleup going into next year so across all four.
<unk>, we feel really good that is we end this year all of them will be in a position where they are processing samples and ready to scale up and deal with the pent up demand that they've had.
Your next question comes to my mind of Dan Leonard with Wells Fargo. Your line is open.
Thank you just a couple of on the expense side. One can you elaborate on what's happening on the gross margin lined both the driver of the sequential downtick into further downtick expected in the fourth quarter and then secondly can you talk about does the anticipation of the of the Grill acquisition philosophically change any of your thing.
King around base alumina budgeting as you roll into 2021. Thank you.
Yeah. Thanks, Dan for the question so with regards to gross margin first of all.
The downtick from two.
<unk> Q3 was really.
Expected for our expectation so gross margin KNX slightly better than our expectations and that was driven by some.
<unk>, we have some additional freight expensive some additional compensation expenses in our operations organization.
And also some of the ramp on the projects as well had some additional impact on gross margin.
Or cost so that's that's per expectations the queue for down.
Downtick sequentially versus Q3 is really mostly driven by mix and the fact that we have a an.
Instrument quarter, that's that's strong that alpha.
Outweigh some of the benefit from the consumables.
Mixes impacted negatively by that with regards to.
The expectations for 21 really when we think about the core business and aluminum, there's really not a material change in terms of our budget Osophy and approach. We are absolutely focused on continuing to invest in the core business and also generating the shareholder returns that we were that we were committed to in the core business.
To continue to drive towards that over time.
But at the same time, we have a really compelling opportunity with grill and we're going to continue we're going to invest behind that opportunity is going to be dilutive and.
In the next few years, but but we're committed so not a major change in terms of our budgeting philosophy for 21 on the core business, though.
Your next question comes from the line of David Westenburg with Guggenheim Securities. Your line is open.
Hi, Thanks for taking the question. So we appreciate it kind of your long term expectations of double digit growth and consumables sequencing consumables can you quantify how much of that is clinical and specifically oncology as a component of growth and then it was kind of a follow up to that can you quantify or maybe even just qualify.
The opportunity of moving from panels are two two panels from hotspot testing in terms of.
Just gross Sir thank you.
Yeah sure David So maybe.
I'll start by saying look.
As the entered this year.
Talked about the fact that the clinical business represents just under half of our sequencing consumables.
But we also talked about the fact that that part of our business is growing significantly faster than the research side of our business and so.
You should expect those lines to cross and once they cross they aren't going back that sequencing consumables from the clinical business is going to be the majority of our sequencing consumables both in dollars and in growth going forward off those sequencing consumables from the clinic oncology testing for therapy selection represents the biggest.
Part of that market.
And so.
We haven't.
You should expect that to continue going forward and you haven't given longterm numbers there, but you should expect that to continue to be the biggest part of the sequencing tools and the clinic going forward.
We do expect for a number of reasons to continue to see the migration from hotspots to larger panels and frankly from.
Not just hudspeth, the smaller panels larger panels too and that's driven by a number of things, including the increasing use of T. M. B as a biomarker for for therapies and so if you look at what happened with Keytruda. For example in the last few months that continues to add momentum to say, it's not enough.
Just to look at Jean hotspots to prescribe a therapy, but you need to look at things like like TMV and that will require the use of larger panels and so you take that you take the fact that you're seeing <unk>.
And I talked about asthma for example, you're seeing momentum and guidelines to.
To use biomarkers like T M B and all of that will continue to drive momentum to the larger panels, which will then drive more sequencing and we'll make oncology testing grow even faster and therefore be a bigger component the sequencing conceivable revenue going forward.
Your next question comes from the line of Dan Brendan with UBS. Your line is open.
Great. Thanks for thanks for taking the question France's could you just.
Give us a sense of the upgrade opportunity that still remains ahead of you for your smaller customers that are in the high sic I guess, we haven't.
Gotten to that date, and while I'm, particularly in light of the <unk> in the comments this quarter about the the strong demand unless I see that you saw so any any color regarding the size of that opportunity maybe like early tracks and looked like this quarter and kind of how do you think that upgrade opportunity involved if you look out thanks.
Yeah, So maybe I'll start with sort of a qualitative view and.
And we can work our way through that so when we talked about sort of the the multiyear.
Upgrade opportunity for for for Nova seeks there is this next segment that we're activating starting with the version one five reagents, which is the smaller Corps labs.
Are the ones that are still primary still using the hiseq and and frankly, they haven't had the volume to justify the upgrade because you need volume to see the benefits associated with the consumables.
Dropping cost.
One five now changes the economics for them and that's those segment of the customer base that we're looking to activate.
It's been a while in terms of the number off.
Instruments, or maybe I'll turn it over to use amateur to give us some color on that.
Yeah, maybe the color I'll give Dan and thanks for the question as as we think about the Nova sic.
Placements I know, we used to give more specificity around this when we first launched <unk> and the number of heisey customers that we still expect.
To take on <unk>, but.
We haven't provided that for some time, but the the metric I will give you as for noticing placements year to date, we're still seeing roughly 40% ish or so coming from new to aluminum customers. So really a great sign around the democratization of of sequencing that Nova sic is done we're seeing it.
About an additional 40% or so that's coming from Nova sic capacity upgrades. So existing obviously customers that are just upgrading or taking on more capacity and then roughly 20% or so from those hiseq customers that are continuing to transition to an overseas. So that's still going on we're going to continue to see that.
The view one five upgrade that we talked about will also help catalyze that as well, we'll drive drive that as well so.
Very encouraging and good room for upset.
There are no further questions at this time I'll turn it back over to our presenters for any closing remarks.
Thank you and as a reminder, a replay of this call will be available on our website and Investor Relations section.
As well as to the dial and instructions contained in today's earnings for me. Thank you for joining the call. Today. This concludes that huh and we look forward to updating you on our progress in the fourth quarter.
Thank you ladies and gentlemen, this concludes today's conference call, even though it disconnect.
Okay.
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