Q4 2020 Illumina Inc Earnings Call
Yeah.
Good day, ladies and gentlemen, and welcome to the fourth quarter 2020, Illumina earnings Conference call.
This time, all participants are in a listen only mode.
And the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
Acquire any further assistance. Please press star zero and I would now like to introduce your host for today's conference calls Juliet Cunningham BP Illumina Investor Relations.
Good afternoon, everyone and welcome to our earnings call for the fourth quarter and full year 'twenty and 'twenty.
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 you have not had a chance to review the earnings release, it can be found and the Investor Relations section of our website at Illumina Dot com.
Participating for Illumina today will be Francis just use that.
Yeah, and Sam Samad CFO.
Francis will provide an update on the state of alumina business and Sam will review our financial results.
The call today is being recorded and the audio portion will be archived and 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 and.
<unk> Illumina is most recent forms 10-Q, and 10-K with that I'll now turn over the call to Francis.
Thank you Juliet and good afternoon, everyone.
Illumina had a strong finish to 2020 with both revenue and orders and setting New records.
Fourth quarter revenue of $953 million was up 20% sequentially from the third quarter.
Sequencing instruments grew 29% quarter over quarter.
We also booked the second highest novus seek units during the fourth quarter.
Primarily driven by the August launch of our V. One dot five reagents.
V. One dot five resulted in higher new customer growth as well as additional hiseq conversion.
Nobody's he continues to be the market, leading sequencer as it enters its fifth year since launch.
Full year, 'twenty and 'twenty revenue of $3 $2 billion declined 9% year over year with the largest impacts independently in the second quarter.
Our business accelerated and the second half of the year growing 17% compared to the first house.
And 2020, we shipped more than 2000 and sequencing systems setting another record from mid throughput chipman and added more than 700, and new customers, which exceeded our expectations.
I'd like to share some fourth quarter highlights by platform, starting with our high throughput systems.
Nova Sea consumable pull through was at its highest level of the year at over $1 $2 million per instrument.
We expect nobody seek boku to continue at pre pandemic levels of 1.1 to $1 $2 million per year and 2021.
The Novus seek V. One dot five reagent introduction is catalyzing, a new wave of high throughput customers as a 600 dollar Gino and became a reality for labs of any size and.
In fact over half our Novus and <unk> system orders in 2020 worked and new high throughput customers.
This includes customers like Argentina, and Ministry of Health, who purchased nobis seek for infectious disease research.
The one dot five introduction also accelerated the purchasing timeline for Soekarna accounts.
Research organization, and a new to high throughput customer who plans to use their novus and <unk> to support oncology clinical trials.
The V. One dot five reagents are also strengthened and the economic case for legacy Hiseq customers to upgrade.
The University of Oregon, Who's using Novus seek for large single cell and epigenetics studies and.
We ended the year with about 1000 active hiseq units and in 'twenty and 'twenty. One we expect continued hiseq to nobody seek adoption among the 320 customers yet to transition.
Moving to mid throughput 'twenty and 'twenty marked the second consecutive year of record placements and the mid throughput segment continues to provide durable growth and our core business.
Fourth quarter strength was primarily driven by the successful launches of new peak 1002 thousand.
And also drove an increase and mid throughput consumables revenue for the full year.
Looking ahead, we expect continued net peak expansion in 2021, particularly and the clinical segment.
Notably we received NFPA approval in China for next week.
Driving demand and local hospitals and applications like oncology and infectious disease testing.
We expect this approval to drive next week Dx placements and further increase our clinical presence in 'twenty and 'twenty one.
We added more than 500, new low throughput customers and 2020, bringing our total to more than 6100 customers worldwide.
Our platform is called the largest set of flow cell configurations and enable the most expensive set of supported methods with run times as fastest five hours.
And the fourth quarter, we had record low throughput consumables revenue driven by customers like and Vijay with products and development using my seek Dx.
I'll now provide update on our clinical and research and applied segments.
Total sequencing consumables revenue of $2 billion was down 2% year over year, reflecting the impact of the pandemic and academic and research institutions.
By the fourth quarter of 2020 clinical sequencing run rates actually exceeded pre pandemic levels and research run rates also returned to normalized pre pandemic volumes it.
It was great to see how our customers successfully rebounded under these challenging circumstances.
More than 43% of our sequencing consumable shipments in 2020 were to clinical customers.
Which includes testing for oncology reproductive health and genetic disease.
Clinical testing prove durable during the pandemic with clinical consumables growing about 8% year over year to approximately $819 million in 2020.
And the fourth quarter clinical consumables growth accelerated to over 20% year over year.
And clinical and.
First the tremendous progress made and market access and reimbursement. We believe recent landmark coverage decisions will drive greater adoption of next generation sequencing to new levels over the next several years.
And oncology 205 million lives are now covered for tumor comprehensive genomic profiling and the U S.
And with an increasing number of targeted oncology therapies, we expect CGP to grow to be $1 billion plus market by 2026.
Additionally, Germany recently started covering tumors, CGP and whole exome and whole genome for rare and undiagnosed genetic disease without restrictions.
This means that 73 million lives, who have better access to CGP and whole exome and whole genome testing.
And reproductive health with multiple large payers expanding coverage for all pregnancies, and we expect and ITT coverage and the U S to exceed 3 million pregnancies and by the end of 2021.
And finally whole genome sequencing coverage for genetic disease testing increased tenfold in 'twenty and 'twenty and we expect WGS to become the standard of care and genetic disease awareness and reimbursement continues to grow.
With these positive reimbursement trends as the backstop I'll now discuss our clinical focus areas and a little more detail.
Oncology testing continues to represent approximately 20% of total sequencing consumables and it grew year over year driven by companies like Garden health, who expanded its mobile phlebotomy services to help patients access its gardens and 360 liquid biopsy tests during the pandemic.
This also includes genomic hubs and the NHS that adopted Novus and <unk> comprehensive genomic profiling and the standard of care and the U K and.
In oncology centers, like Florida cancer specialists, a private community oncology and hematology practice with nearly 100 offices throughout Florida.
Florida cancer specialists purchased multiple next week Dx systems in 2020 to run Illumina Tuesday, and oncology 500 assay and its new lab.
Reproductive health represented about 12% of sequencing consumables with revenue and samples for our end to inverse Zika and ITT solution growing over 20% in 'twenty and 'twenty.
Lastly, about 10% of our sequencing consumables revenue is related to genetic disease testing cusp.
Customers continue to choose Illumina is highly accurate and scalable sequences as their platform of choice and this area.
For example, the recent collaboration between Wild Cornell Medicine, and New York Presbyterian Hospital and partnership with the New York Genome Center will use Illumina technology for clinical WGS and areas like cardiovascular metabolic and neuro degenerative diseases.
Turning to our research and applied segment revenue of approximately $1 $2 billion represented just under 57% of our sequencing consumable shipments and was lower by about 6% year over year as customers were impacted by the pandemic.
Research and accelerated in the second half growing 20% compared to the first half as researchers return to their labs.
This segment includes research and oncology and genetic disease as well as population genomic and research initiatives.
And our sequences enabled programs like K DNA, a large scale Korean project aiming to sequence 1 million genomes by 2030.
Service provider consortium standardize on Illumina technology, one the competitive tender based and Novus seek superior technical evaluation.
The program plans to complete at 7500 genome phase one by the end of the year.
The NHS commenced a phase rollout for whole genome sequencing and the fourth quarter for selected rare disease and cancer patients as part of their routine care.
Once this life clinical testing phase is complete we expect the whole genome sequencing service to further ramp and this spring we expect the all of US program to continue to scale. This year and the NIH anticipates, releasing D identified data from 100000 and sequence and array genotype samples to its research portal by the end of 'twenty and 'twenty one finally.
As a leading innovator illumina remains steadfast in the defense of our intellectual property globally we.
We received injunctions against Pgi for patent infringement, and the U S, Germany, UK, Spain, Sweden and Finland.
We remain confident that our IP portfolio affords strong protection for Illumina as innovations now and well into the future.
And now I'll turn it over to Sam.
Thank you Francis.
As Francis discussed we had record fourth quarter revenue grew slightly year over year to $953 million, driven by 1% growth and sequencing offset by an 8% decline and micro arrays and <unk>.
It'll sequencing revenue reached a record of $846 million, which represented 89% of total revenue and the fourth quarter of 2020 and grew 19% sequentially.
Sequencing consumables revenue grew 5% compared to the prior year period and 20% sequentially.
Sequencing instruments revenue was roughly flat year over year and grew 29% sequentially and sequencing service and other was down 15% compared to the prior year period.
Due to IBD partnership revenue recognized last year.
Moving to regional results the Americas revenue grew 14% sequentially.
Revenue in the region was 2% lower compared to the prior year quarter, which was primarily driven by one time technology access fees for and IBD partnership and lower DTC revenue.
These items were partially offset by sequencing consumables, the Americas had record sequencing product revenue and the fourth quarter driven by clinical customers.
EMEA delivered record revenue of $285 million, representing 34% sequential growth and 2% growth year over year, driven by strong instrument revenue from Novus and <unk>.
We also saw certain customers and emerging countries, taking their first and overseas shipments.
Greater China grew 16% sequentially and 3% year over year to $96 million.
And had its highest sequencing instrument revenue quarter since 2017, driven in part by growing demand and hospitals.
Subsequent to Q4, we also announced the Sequoia capital, China, genomics incubator, which builds on our other incubator efforts and Silicon Valley and the U K.
Together, we will partner with leading entrepreneurs and China to build genomics startup companies to create breakthrough genomics applications and clinical sequencing solutions.
Finally, a P J revenue of $77 million was up 24% sequentially and up 5% from the prior year period.
And for the full year the region was roughly flat compared to 2019 with full year growth and sequencing consumables.
Moving to gross margin and operating expenses I will highlight non-GAAP results, which includes stock based compensation.
I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and the supplementary data available on our website.
Please note that all subsequent references to net income and earnings per share refer to the results attributable to illumina shareholders.
As expected.
<unk> non-GAAP gross margin of 66, 9% decreased approximately 50 basis points sequentially.
Year over year fourth quarter non-GAAP gross margin was down 330 basis points, primarily due to a one time inventory write down in Q4.
And one time IBD partnership revenue and the year ago quarter and.
And higher freight costs related to COVID-19.
Non-GAAP operating expenses of $439 million were up $74 million sequentially as expected, reflecting the extra week and the fourth quarter variable compensation expenses and other investments.
Non-GAAP operating margin was 29% down from 21, 4% and the third quarter.
Non-GAAP other income of $20 million was $13 million higher sequentially due to gains on short term investments sold as we repositioned our investment portfolio for the anticipated funding of the Grail acquisition.
The non-GAAP tax rate of 18, 4% was up from last quarter due to a discrete charge related to a tax structure initiative and the fourth quarter.
The sequential increase of our tax rate in Q4 was also impacted by discrete tax benefits and the third quarter of 2020 related to prior year return adjustments.
For the fourth quarter of 2020, GAAP net income was $257 million or $1 75 per diluted share and.
And non-GAAP net income was $179 million or $1 22 per diluted share.
Moving to cash flow and balance sheet items cash flow from operations was $406 million.
DSO of 50 days compared to 53 days last quarter driven by revenue linearity.
Fourth quarter capital expenditures were $62 million and free cash flow was $344 million.
We repurchased $280 million of stock and the fourth quarter.
We ended the year with approximately $3 5 billion and cash cash equivalents and short term investments.
Our weighted average diluted share count for the quarter was $147 million.
Moving now to 'twenty and 'twenty, one guidance, we expect full year 2021 revenue to grow and the range of 17% to 20% or $3 79 to $3 $89 billion representing.
Representing an increase of approximately $599 million at the midpoint.
For the full year 2021 at the midpoint of our revenue guidance range, we expect sequencing revenue to grow approximately 20%. This includes sequencing consumable growth of around 20%.
We expect sequencing system revenue to grow 33% year over year, driven by placements of Novus seek due to continued hiseq conversions and the adoption of <unk> five reagents.
As well as placements of next seek due to and exit 2000, and the X demand.
And arrays to grow approximately 5% compared to 2020.
We expect full year non-GAAP gross margin to modestly improve from 2020, reflecting increased leverage from higher volumes and cost savings initiatives, partially offset by product mix and IBD partnership revenue and the first quarter of 2020.
We expect 2021 operating margin to be approximately 24%.
As volumes increase and freight charges normalized we expect both gross and operating margins to improve and the second half of 'twenty and 'twenty, one and be above the full year average.
We expect other income to be about $40 million lower than 2020 due to the gains and the fourth quarter of 2020, lower interest rates and shorter duration investments and anticipation of the close of the Grail acquisition.
We expect GAAP earnings per share to be and the range of $4 76 to $5 and one.
And non-GAAP earnings per share and the range of $5 10 to $5 35.
And we expect diluted shares outstanding and 2021 to be approximately $147 million.
Moving to the first quarter of 2021, we are raising our previous expectations and we now expect high single digit revenue growth compared to the first quarter of 2020.
We expect sequential improvement and non-GAAP gross margin.
Sequential decline and non-GAAP operating expenses similar to historical seasonality non-GAAP other income to be significantly lower compared to the fourth quarter of 2020 due to the onetime gain on short term investments previously discussed and.
And as a result, we expect non-GAAP EPS to be slightly higher compared to the fourth quarter of 2020.
I'll hand, the call back over to Francis for his final remarks.
We're off to a strong start in 2021.
We're seeing strength and our core business and are playing an essential role and the emerging surveillance effort necessary to fight the pandemic.
And the past couple of months as new more dangerous Sars Covid. Two variants have emerged there has been a growing recognition of the need for COVID-19 surveillance around the globe with.
And with countries like the U K, Australia, Canada, and Germany, leading the way and deploying national surveillance infrastructures.
In the U S. The proposed budget package contains $175 billion from the CDC to conduct expand and improve activities to sequence genomes identify mutations and survey the transmission of viruses, including Sars Cov two.
Sequencing based surveillance is one of the key elements and the fight against this pandemic and its.
Also becoming clear that sequencing and surveillance are becoming mainstream and the defense against infectious disease.
This global surveillance infrastructure being built right now will be instrumental and identifying future outbreaks, including Corona viruses antimicrobial resistance and bioterrorism illumina.
Illumina is proud to be at the forefront of this important work.
We'd also like to congratulate Nobel Laureate and Illumina Board member Dr. Frances Arnold who was named as co chair of the U S. President's Council of advisors and science and technology.
We believe the recent appointments of highly experienced scientists signal the administration's focus on science, including genomics to improve life and the U S for everyone.
And finally, we continue to expect to close the Grail acquisition and the second half of this year.
Enabling us to help accelerate the adoption of early cancer detection screening and.
And opening up the largest application for genomics by far and we're.
We're looking forward to drill Lunching gallery and Q2.
We see a vast number of opportunities ahead of us and there has never been a more exciting time to be in genomics and illumina.
Now I'll invite the operator to open up for Q&A.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key please standby will be confound the Q&A roster.
And your first question comes from Dan Brennan with UBS.
Great. Thanks for thanks for taking the question I had a two part question Francis I guess the first one really for Sam was just on the earnings guidance for next year.
And includes a substantial amount of opex.
And spending and really not getting much webex and I'm, hoping you can walk through that a little bit because your initial guide kind of surprised us and then secondarily I was hoping that you could walk through in terms of your sequencing guidance for next year and Francis in terms of and obviously success you've had thus far of the remaining hiseq.
Existing customers that haven't converted can you give a little more color on kind of what's baked in in terms of the new.
The one 1.5 warrants and how many of those you expect to convert.
And that's kind of what's impacted and your guidance. Thank you.
Yeah. Thanks, Dan So this is Sam.
Hope you're doing well so let me talk a little bit about the EPS guide.
There's 10 to $5 35 for this year.
Basically we're expecting roughly 24% operating margin. So there is an element of opex growth and there and part of that is a onetime also impact.
Related to stock based compensation and we talked about at JP Morgan when we provided the guidance, which is related to two plants for the 19 and 20 plans and were significantly impacted by the pandemic and that we are modifying the targets on those plants. So that has a one time catch up expense.
In 2021 of approximately $50 to $55 million and that's really a significant portion of the opex growth beyond that we're continuing to invest behind our platforms behind our technologies behind our assays, so which we are committed to R&D is a big commitment for us as we look forward. Then you know our goal is to.
To improve in terms of the leverage on our operating margin to get back to traditional operating margin levels that we had back and 19, which were close to 30% that will take some time to get back to you, but that's a commitment that we have is to continue to drive operating leverage by making sure that we're very actively focused on G&A investments and reducing or making sure that.
Those continue to grow beyond the rate of growth and revenues, but that we continue to invest in R&D and and to some extent commercial as well, but we are committed over the long term to get back into operating leverage and in fact, and the second half as well of the year as we get past the pandemic. The second half, we expect to see and improvement in terms of both gross margin and operating margin.
Versus the first half and definitely higher than the full year as well for gross margin and operating margin.
Super well, thanks, Sam So Dan and I'll take your question about <unk> this year and touch specifically also on the remaining hiseq customers and how we're thinking about it this year. So I'll start by saying that look we're entering this year with a lot and momentum OMNOVA seek the version one five and obviously create and said we released in August really did.
A nice job in terms of unlocking the elasticity of demand and that high throughput segment of the market and so as we talked about you know coming into this year, we're coming off of Q4, where in our first quarter of selling the version one five reagents nervously consumables had a record quarter.
Growing and the mid teens year over year, so really strong from a consumable perspective.
And we talked about the fact that and Q4. We also had our second highest quarter in terms of bookings orders for <unk> and the first highest was when we first launched and obviously back in 2017, so both from a and instruments perspective, and a consumables perspective, and we're coming off a really strong Q4, and we're walking into this year with.
And really strong pipeline and a strong backlog following the orders that came in and Q4. So as we think about this year than there are two sources of demand and we see four for Nova seek one and we've talked about this and Q4 also that we're seeing because of one five where do you and unlocking of demand from new to high throughput customers and.
If you think about and Q4 over half the bookings went to new to high throughput customers. So again that new pricing is opening up the market for new customers to come in and the other source of demand for <unk> coming into this year is the remaining hiseq customers and as we pointed out there are off our original hiseq.
Base, we still have 320 customers that have yet to begin the upgrade cycle and now with the lower pricing on one five these typically smaller core labs now have and Nova seek accessible to them and if you look at the pricing now.
All it takes for Hiseq 2500 customer is for them to run about four high output gets a month and they can justify the list price of and Novus seek and a year. In addition, with the one five release, we extended the shelf life of the consumables from three months to six months. So they don't have to sequence and frequency to justify.
And the upgrade and then finally, the new 35 cycle. That's for kits also enables accounting methods now and the Novus and <unk>, which was important to those labs. So you add all those in and we're walking into this year with strong momentum and the Novus excited and that's what we expect to drive.
Orders this year and in fact, we were expecting.
And another strong year of Nova seek and orders coming into 2021.
Your next question is from Tycho Peterson with J P. Morgan.
Hey, Thanks, a couple of quick ones here on the fourth quarter was there any consumable stocking we didn't hear about that from one of your peers last night and then how much of a record order book with catch up spending versus Francis what you just talked about the acceleration and adoption driven by the flow cell and then I am curious why margins were so soft you just had the price adjustment and the inventory write down.
And stock based comp, but it seems like maybe there was more there curious if youre kind of pulled forward any spending.
And then separately shifting to the outlook and it's good to see Youre stepping up their first quarter guidance here versus what you gave at our conference I'm. Just curious if there was something that changed and you're out with the original guidance down 90, 10%, obviously didn't really make a ton of sense of this is more in line with what I think people have been expecting anyway, but I'm curious what drove that and then Francis.
Broadly I'm wondering if you can comment on the surveillance opportunity just how material you think that could be and how much of that you think ends up getting done on short versus long read. Thanks.
Yeah, So maybe I'll cover a couple of other points that you mentioned upfront Tycho and I'll, let Francis talked about the surveillance aspect. So I think there's a lot there so hopefully I'll capture everything here, but in terms of Q4 stocking listen we had a very strong quarter and Q4, we did not see any unusual stocking beyond what you see traditionally at the year.
And I mean, theres, usually a reset of budgets at the end of Q4 academic budgets and of the year.
So beyond what we usually see every year, we have not seen any unusual stocking in Q4, and we validate this by looking at basically activity on our sequences. When you look at the activity of the data that we have looking at all the active sequences that we have that are connected and in fact, we saw a strong increase in terms of activity levels in Q4.
For in terms of clinical and getting back and showing growth pre pandemic levels and in terms of research now going.
Basically at pre pandemic levels. So.
And I'm pleased to see that and which validates that there wasn't any unusual stocking at the end of Q4 and terms of gross margin I think we talked about the drivers Tycho I mean, we're still and are impacted by the pandemic freight is still a factor for us and Q4, we did have the one time.
Right down on certain inventory, which was approximately one percentage point impact negatively on gross margin.
And and.
The mix was an impact as well and Q4, because we had strong instruments and the quarter as well. So those are those are the things that impacted margins in Q4, we expect margins to improve in Q1 to progressively improve across 2021.
And in the second half and facts to be as I said earlier above the full year average and starting to get back to our what we call our normal levels of 70% plus not quite a 70%, but close to that and the second half. So we definitely see that as we start to get out of the <unk>.
Constraints, driven by the pandemic and which resulted in higher freight and other higher expenses with regards to Q1 outlook.
We are pleased to be raising our Q1 outlook based on what we're seeing we're seeing strength in the business, we're seeing strength and activity levels again.
Too early to comment specifically its been four weeks since the start of the year, but everything that we're seeing in terms of orders is really encouraging. So we are we're pleased with where the business has started.
Yeah, let me build on.
Yeah, Let me go ahead and Sam's remark so.
Youre right Tycho this is a significant rates for us.
In terms of what we were and what we were expecting for Q1, given what we shared at JP Morgan JP Morgan and what we shared was very typical for our business and other players and our business, which is sequentially from Q4 to Q1 because of the capital cycle you expect a decrease in revenue and that's what we called and we said look you should expect us to be flat to Q1 of <unk>.
Last year.
But we're seeing a lot more strength even in the first few weeks of the quarter and that strength is coming from our core business as Sam said and we're monitoring both not just orders, but we're monitoring activity levels and exiting Q4 and into Q1, we're seeing strong activity levels, both from the clinical side of the business.
But also on the research side of the business and so as we stand here and it's become clear to us that instead of being flat to year ago, we're going to be up.
High single digits, and so we're coming pretty close to where we were in Q4.
And that's unusual in this business, but it really speaks to the strength that we're seeing in terms of orders coming and obviously, there's a lot of year left and so we're leaving the year guidance intact, but certainly with strength.
And Q1 in terms of surveillance service into something that we've been talking about now for about a year and.
And the idea is that in addition to rolling out testing infrastructure to fight. This pandemic you will meet surveillance infrastructure to understand how the virus is spreading geographically and how it's mutating and that information about mutations are essential to understand the tools, we're using to fight the pandemic the diagnostics the vaccines or therapies will continue to be effective.
And really it was the outbreak we started to see around Christmas and it to be one one and seven variant and the U K and then the South African variant that started to really get people to realize that we do need the surveillance infrastructure. So it didn't contribute much in terms of revenue in Q4, and we've only built and a modest amount in Q1, but you can see the activity right.
You can see the activity and and called U K, you can see the activity and countries around the world, and France, and Germany, Italy, and Spain, and gritty sort of around the world.
And we expect that to continue over the course of this year is guess is.
Countries Buildout, the surveillance infrastructures and that's going to be a durable surveillance infrastructure, we didn't need it and the future to warrant and through the next pandemic to warn us of bioterrorist attacks antimicrobial resistance and what's interesting is that Illumina is technology is uniquely well suited for this need and the reason for that is because we have unmatched acura.
Lucy we can deliver the highest scale, we can deliver the price point per sample that's necessary and we also have the first cleared product for customers to use and so those things came together and you'll see that playing out and the numbers right. So right at the very beginning we were the sequencer used in Wuhan, and then and Shanghai to publish the first.
Viral genome.
Illumina sequencing data that was used by the vaccine developers to develop the vaccines. The mrna vaccines that are being used today and that was because of the accuracy of the illumina sequencing and now as you look at the large scale initiatives cog UK and some of the other ones, it's illumina sequencer and thats being used because of the scale that we can achieve and the throughput.
And the turnaround time, and so you look at the numbers of the genomes and just say for example, and you will see that the vast majority of the data and just say the vast majority of the genome that have been sequenced have been done and Illumina sequencers and so.
Very exciting very important.
<unk> now.
Your next question is from Doug Schenkel with Cowen.
Yes.
Thanks.
Hey, good afternoon, everybody. Thank you for taking my questions.
Let me, let me just rattle through them real quick.
No, but seat utilization and oversee consumables pull through on an annualized basis I believe was about $1 2 million and the fourth quarter I believe your expectation for 2021 at least in terms of what's embedded into guidance is one one to one two per box.
I'm just wondering what's driving the assumption for slightly lower utilization versus Q4, keeping in mind that there was no abnormal stocking and Q4.
There's a couple of things I can think of maybe it's just early in the year uncertainty, especially as we're coming out of the pandemic, maybe it's the expectation for a lot more boxes being placed which can pressure.
Or at least initially on an average basis.
And or it could have something to do with the B, one five reagent price and haven't had an impact. So some some some detail on that assumption would be helpful.
And then the second thing and I wanted to talk about was just Grail do you expect Pathfinder data in Q1 is that still the case when would you expect to initiate registration studies and can you share anything in terms of progress being made with self insured employers.
Health care systems, and <unk> systems. Thank.
Thank you.
Yes. Thank you Doug This is Sam maybe I'll start with your pull through question and then I'll, let Francis talked to Grill. Yeah. I think you I think you hit the nail on the head with the comments that you made around pull through I mean, we are we have.
Had a very very.
I would say.
Strong pull through in Q4 in terms of $1 2 million for instruments, we were back to above pre pandemic levels actually at the high end of the guidance range in terms of pre pandemic levels.
We do expect with the V. One five that you will have that it will catalyze.
<unk> Hiseq conversion with those 320 remaining hiseq customers. So those will start to also transitioned to and oversee that has a I would say a very modest impact on pull through on the on the downside, but also you have the large centers that will drive flow through higher on the upside.
And but as you said, we're still in a pandemic here. The first six months of the year are expected to still be.
Basically a pandemic realities, so to speak and at this point I think it's prudent that the guidance that we have and the expectation that we have is the one one to $1 2 million range, but very encouraged by what we saw in Q4.
Yeah, and I could add on the on the ground side. So.
No no new updates what that means is grills on track for its pathfinder.
Results as they said.
J P Morgan and their announcements.
For Q1, and they're on track for a gallery launch in Q2.
We know they are making progress with both health systems and self insured employers they haven't announced anything yet, but I know for example, we are marching down the path at Illumina to make the grill test available to our employees and the second half of this year and as part of that process. Our team has been engaged with other employers that are also.
And process with them the big announcement, obviously from the health system side was the announcement around the NHS and Thats.
Tracking for the pilot to be launched this year and as a reminder, that is a 165000 tests that they've committed to doing with the intent then assuming that goes well to do 1 million tests in 2024, and then do a population wide rollout.
Yeah.
Your next question is from Puneet <unk> with SBB Leerink.
Okay.
You know, 20% sequencing consumable growth this year just.
And trying to understand a little bit in terms of you have and youre pointing out number of growth drivers here easy comps, obviously, new chemistry 600.
Genome discount that we saw in the fourth quarter and Thats, obviously driving elasticity of demand here as you would've expected.
There is increased and Covid sequencing COVID-19 variance, that's coming in and Theres post pandemic and instrumentation and buys and cancer patients potentially returning back as they get vaccinated, and and 2021 year and Mardi and screening and those trials were ramping up too. So I just wanted to understand sort of.
No.
Why the conservatism and at <unk>.
The percent given all of that as a backdrop and then.
I also wanted to understand first of all I. Appreciate you providing the roadmap details in terms of product improvement that you expect but wondering how should we look at that and in light of the customer event that you have coming up here and and then lastly, if I could also touch on.
<unk> and <unk>.
D that's being up.
And our new focus area for grilled. So there are already two competitors in the place and the market there.
So how do you position and to that market and and also how do you.
Whats your expectation in terms of those.
Other competitors are obviously theyre running samples on Illumina sequencer students. So what's your expectation for that I'm already market here acceleration over the next one to three years I. Appreciate you taking the questions. Thank you.
Yeah, Thanks, Puneet and hope you're doing well. So this is Sam I'll start with the sequencing consumable.
Question, and then I'll, let Francis comment on the roadmap question and the Mardi one as well so.
We are expecting 20% sequencing consumable growth this year for a number of reasons. There are some very good sales tailwind and the business and strengthened the core business that drive us to that.
As you mentioned you know additional.
And market access and coverage for both on the <unk> side on the <unk>.
Kinetic disease side, we're seeing definitely growth and the comprehensive genomic profiling on the oncology side. The <unk> five is a great introduction.
The Covid variance part Puneet, we have not really assumed a significant impact of that and our guide that's something that we're really encouraged by in terms of the surveillance aspect. We are seeing definitely strength from that but again a bit early to really size that for the full year. So that's not.
Significantly included in our guide I would say and then remember one other thing as well is we're still and again I don't want it sounded like a broken record on this but we are still in a pandemic here and we still have we still have an expectation here that for the first six months of the year that we are and a pandemic. So this I would not call. This a normal year, but.
And the second half, we hope to be coming out of the pandemic definitely with the with the progress that's being made around vaccination rates as well, but all good points that you made but.
Hopefully this gives you some additional background.
Yeah. So now I will talk about two things and I'll talk about the customer event.
About the roadmap and I'll talk about the grill.
Test so we.
We do have a customer event, it's going to be sort of our first global this your virtual customer event that we will have at the tail end of April is shaping up to be a terrific event and we have some some fabulous speakers.
And we have tracks for different segments of our customer base. So there'll be a track for example on population sequencing, where we will convene some of the largest population sequencing initiatives around the world to come together to share best practices and learn from each other and we will do the same thing on oncology testing and so on.
I suspect to where you were going with that Puneet was so we're going to announce anything and at the customer event and I've been on the record of saying I'd love to announce products in front of customers rather than from the bankers.
But obviously I can't say, what we're going to do and tons of product Roadmaps as a company, we don't pre announce products. What we did announce recently the <unk> flow cell on the next week, we announced ICA the connected analytics platform and J P. Morgan and what Youre seeing really nice traction and population sequencing efforts.
And obviously what would be the one five.
So you'll just have to stay tuned in terms of what we announce a win in terms of the grill and bar.
And Marty and general and the Grill and bar D tests.
Are very excited about.
The impact on patient size from having and M. R&D test, we think that that will.
Improved life of cancer patients and enable them to catch recurrence earlier.
And that's going to be an important market and there's a big opportunity there and as you said there are two customers already of ours that have Mardi tests.
We will support them, we want to make sure. They are hugely successful because this is an important segment and a large segment of the genomics applications as well. So we will continue to do everything we can to make sure. They are successful. We're also excited about grills MRV test and and grant has a little bit of a different take on their approach on <unk> and.
The difference between what Grail is trying to do and what some of the other players are trying to do is that.
And the tests that exist and the market today are patient specific tests and so the way it works is.
You do a tumor profile on a particular patient's cancer and you based on the tissue sample do you take from that patient and then you create the test for that for that cancer patients and then you and can you run that as a blood test and going forward. So terrific test very important very groundbreaking.
But because you're taking a tissue sample and you're building a patient specific test. It does take some time Grail is using a different approach database and their EMR D tests on their screening test, which means it isn't patient specific that it's the single blood test that they use for screening that they're using for MLD as well that should significantly.
Decompress the timeframe in terms of having that test available for a patient and it doesn't require a tissue biopsy and so we seem to have a differentiated view and the market and we're excited about bringing that to the market as well and giving patients the choice over the last few weeks Grill announced some important partnerships. So at JP Morgan and you talked about the fact that.
<unk> announced partnerships with Amgen Astrazeneca, Bristol Myers Squibb.
And as as partners for it's Mardi test, obviously, a terrific set of partners and continues to show good momentum around the development of that test of Grail.
Your next question is from Derik de Bruin with Bank of America.
Hi, good afternoon.
Hey, there Derek Derrick so to.
Two questions. So first one I just wanted to talk about is can you talk a little bit about the.
Pull through expectations for the mid range instruments for the next week and my seek as you look into 'twenty one.
And I appreciate the color on the nobu seek but some commentary there would be helpful, particularly I think on the next week as you are.
As youre, replacing more instruments on the 2001 thousand and side and then on the other side. The other question is a follow up on Doug's can you talk a little bit on Grail in terms of thinking about how you're going to do with sales and marketing plan here and how youre going to address customers. I mean, you do you need to go out and build.
Or by a more primary care sales force.
Given where your current business is not exactly target net market I'm, just sort of curious in terms about your commercialization plans and how you think about guidance go to market strategy. Thanks.
So maybe I will start with the pull through question and thanks, Eric by the way.
And Francis can talk about Grail with regards to pull through on the on the mid throughput and low throughput Derrick So starting with next week, we will not yet give a pull through expectation for next day, there's a lot of moving parts. There as you know with regards to next week 2000, and the introduction and being fairly recently at the end of Q1.
Of last year.
With the next week 1000 coming into the mix as well late in the year and so those will have an impact on next day $5 50, and we're still evaluating what the what.
And what the potential pull through would look like in terms of next week 2000, and so it would be premature right now to give a guidance range around what the pull through expectation is there with regards to low throughput might seek and mini peak as well.
<unk> was impacted by the pandemic and 2020, so usually we give a guidance range of 40 to 45000 per box on <unk>. It was impacted by the pandemic and 2000 Twenty's and so it was well below that and then it started to approach that lower end of the range towards the end of 2020.
In terms of the high Thirty's, So right now we're expecting somewhere for my sake.
Close to 35000 to 40000 in terms of my seek pull through.
Per box for 2021 with regards to the many seek usually the range is 20 to 25 and we are expecting to be on the low end of that range for many seek.
Thanks, Sam So let me pick up then on the commercialization plans for Grail. So.
Let me start by saying that post acquisition and the intent is to run Grail and that's a separate division. So it's gonna have its own set of end to end infrastructure. The go to market plan for Gorilla and you've started to see glimpses of this is not going to be to build this big direct to physician sales force necessarily the initial plan for Grail.
Is to sell to and so the <unk> model right to sell to health systems and National Health systems like the deal they talked about with the NHS for example, but also integrated health systems and the U S.
And to sell to concierge health systems and to sell itself to sell to self insured employers and so that's a and enterprise sales and <unk> sale. So similar to what we do at Illumina.
Obviously, you know a.
A little bit different but we also have an enterprise sales force and so that's the intent with Grail going forward and while there might be some patient advocacy and some education I think one of the advantages that grill have again relative to some of the tests from the market today is that it's a blood test and it does.
And <unk> require a lot of pushing to get people to be compliant with the tests that they have to take home for example, and so it's a little bit of a different model that they're using again.
We are using that model today and so they have.
And sort of <unk> <unk> from the FDA and they are returning results to patients and some really top tier and health care systems and.
And I like the.
And like Cleveland, and so on and so that's the model that they are refining that's the model that's going to be rolled out to the NHS and.
And so that's the model we expect to continue going forward.
Your next question is from Patrick Donnelly with Citi.
Great. Thanks for taking the questions guys.
I had a couple just on China and you guys saw the highest instrument revenue and a few years, there and the fourth quarter I think you talked about seeing some more adoption and the hospital side can you just provide a bit more color on what youre seeing in that region also it would be great to get an update on the competitive landscape have you seen any changes in China and in terms of competitive behavior and then <unk>.
Lastly, probably for Sam just from the guidance what are you assuming for China and in terms of the outlook.
Yeah, Yeah. So.
Alright, great strength.
Maybe I will start with the last part because it's easy.
So we are expecting revenue growth for China.
And that exceeds our overall revenue growth as a company. So I would say slightly above our overall revenue growth.
And we're seeing very encouraging things in China as evidenced by the performance in Q4, and the instrument number that you've talked about but I'll, let maybe Francis give some additional color.
Yeah. So let me pick up on that so we are obviously very bullish and China as Sam said, we expect China to grow faster than the overall company in 'twenty and 'twenty. One so what's driving that a few things one we're now starting to see so that the next wave of adoption and the clinical and market in China, and so we're seeing more hospitals embraced sequencing.
And their own hospital labs, and so that's sort of a wave that started to grow last year, and certainly sort of picking up as we enter this year that was part of the reason why this last quarter and Q4 was the highest quarter. We've had four instruments since 2017, when we launched Novus and <unk> and.
And that was driven partially by hospitals, starting to embrace sequencing and sort of bringing it into their labs, we are seeing.
Covid drive some purchasing of sequencing, we talked about the fact that again, we got called into hung in December 2019, we've been involved since then as part of their pandemic fighting efforts. That's a part of this business and again, it's part of a durable surveillance infrastructure, that's being built out.
And then.
We continue to be long term excited about the opportunity in China and you saw for example announced the partnership with one of the top venture capital firms and China's Sequoia capital, China to launch a genomic incubator and China to catalyze the next generation of exciting genomics applications that leverage illumina sequencing.
Hologic.
Yeah.
Your next question is from Sandy with BTG.
Hi, Thanks for taking the questions just a couple of quick one here one is just going back to the surveillance opportunity for Covid and other applications in the future.
And I don't know if its too early but would you be able to kind of talk about what that the market potential and might be going forward.
And if not is there.
Is it and infrastructure.
And the kind of scale that the fusin balan infrastructure might be currently oriented and much larger scale.
And kind of.
I'm sorry, and then just second question is.
You guys talked about.
The improvement on the <unk>.
A flow cell that order of magnitude improvement.
Leading to roughly 90% of cost savings for the flow cell what does that translate into in terms of the total all in cost per genome. Thank you.
So maybe I'll start and talk about the surveillance opportunity.
It's too early to size of surveillance opportunity I think is sort of the short answer but in terms of how to think about this I think it's done right. It's significantly bigger than what we have today with the flu and obviously this pandemic was sort of a wake up moment from so many perspectives and I'll give you. One example, we were.
Talking to.
Officials from the U S government at some point and so.
Of late Q1, and early Q2, and there was a realization that we have the coronavirus spreading and the U S for weeks and people were dying and 18 months and we didn't even know that we had it and and that's a huge wake up call because that's important not just from a coronavirus pandemic, but it has implications around surveillance for bioterrorism.
For example, and so.
And the wake up call is to say look we need the surveillance infrastructure and we need a global surveillance infrastructure, it's got to be genomics space and it's got to watch for emerging antimicrobial resistance new pathogens bioterrorism.
And the scope of that is significantly bigger than flu tracking that happens today. The other interesting dynamic that's playing out is this is absolutely a public health infrastructure essential for public health, absolutely, but it's also a defense infrastructure and the two are funded very differently right. So public health as you know goes from.
Panic to starvation right from there as a panic infrastructure gets built and then maybe doesn't always get the funding followed through defense and not like that and so this is going to be a combination of both it's going to be a public health infrastructure and it's going to be part of a national defense infrastructure and so do you think about this long term its definitely got a scope that significantly.
Bigger and thinking then what we do it for me today.
Yes, and <unk> with regards to the 90% reduction I mean, Francis introduced some really exciting.
Innovation Road map.
And technology roadmap items and at JP, Morgan and and 90% reduction reduction in terms of cost is really talking about not a product that we have today, but really the roadmap that we have and the technologies that we have today that will become a product that takes us to the $100 genome and below that even in terms of our cost per genome.
Okay.
Your final question is from Tejas Savant with Morgan Stanley.
Yes.
Hey, guys I appreciate the time here.
One quick clean up on Covid surveillance Francis on the <unk> flow cell I believe its shipping and the second half of the year.
There anything you can do to pull that forward in terms of the launch timeline given the focus on surveillance both in the U S and abroad and this need for a lower throughput next week option.
And then my second question is on Grail.
And the past do you sort of alluded to the possibility of potentially some sort of a risk sharing structure and.
And sort of you know illumina being on the hook for.
Our other payers being on the hook for ryzen overall diagnostic testing costs.
Following gallery deployment in order to encourage.
Customers to participate and pilots have you sort of like chopped any wood in terms of implementing those sort of arrangements just yet or is it still too early.
Got it so let me let me answer the one question and then pick up on the.
Sort of I.
And I guess the partnerships.
I'll start by saying that now you know how I feel right in the sense that we have this incredible portfolio of products and our engineering team is building.
And if.
Every one of them I wish we could get earlier, because when I think about the impact and you know, it's 18% of our revenue, we spend and R&D and it's a it's a breathtaking set of products and the team is building.
And they are going as fast as they can to get the product out to the quality and they need especially given the.
The important work that our customers do with our products. So so while I'd love to the reality is we can't pull Q on Florida, Although I know people really really want it and.
And that's true across our entire portfolio.
And I think Youre right. It will actually have it'll have already.
And important role to play even in even and surveillance.
I think your second question was around the partnerships that we were looking to do with other customers and the in the oncology diagnostic space and we're looking to get into screening and we're making progress with those customers. We've signed supply agreements long term site and supply agreements.
With some of those customers and continuing dialogue with the remaining customers.
And so our commitment is to continue to supply them with the technology, they need and make sure that they have.
All equal access to the technologies that we commercialize going forward and some cases those are agreements that are over a decade long.
And that's great for our customers that's great for us too.
And there are no further questions at this time your closing remarks, please yes.
Yes, and thank you so much everyone for the great questions. As a reminder, there is a replay of this call and that will be available tomorrow on our website on the Investor Relations page and.
We look forward to updating you on our progress after the close of Q1 take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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