Q1 2022 Illumina Inc Earnings Call

May 5, 2022

Yeah.

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[music].

Good day, ladies and gentlemen, and welcome to the first quarter 2022 alumina earnings conference call at.

At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Sallie for Vice President of Investor Relations. Please go ahead ma'am.

Good afternoon, everyone and welcome to our earnings call for the first quarter of 2022.

During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity after which we will host a question and answer session.

If you have not had a chance to review the earnings release. It can be found in the Investor Relations section of our website at Illumina dotcom.

Participating for Illumina today will be Francis Desouza, President and Chief Executive Officer, and Sam Tomorrow, Chief Financial Officer.

Francis will provide an update on the state of eliminates business and Sam will review, our financial results which include grill.

As a reminder, pending the outcome of the European Commission's investigation into aluminum is acquisition of grill.

The commission has adopted an order requiring alumina and grill to be held and operated as distinct and separate entities for an interim period.

Compliance with the order, it's monitored by an independent monitoring trustee.

During this period alumina and grill are not permitted to share confidential business information unless legally required and grill must be run independently exclusively in the best interest of grill.

Commercial interactions between the two companies must be undertaken at arm's length.

This call is being recorded and the audio portion will be archived in the investors section of our website at.

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 1095.

Forward looking statements are subject to risks and uncertainties actual events or results may differ materially from those projected or discussed.

All forward looking statements are based upon current available information and Illumina assumes no obligation to update these statements.

To better understand the risks and uncertainties that could cause actual results to differ we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina. Its most recent Form 10-Q and 10-K.

With that I will now turn the call over to Francis.

Thank you Sally good.

Good afternoon, everyone, we maintained strong momentum across regions and markets in the first quarter, we saw particular strength in oncology genetic disease testing and infectious disease.

<unk> record quarterly performance in the Americas and APAC Jay.

Share an overview of our results as well as our progress across our portfolio of end markets before turning it over to Sam for additional detail.

Before I begin I'd like to extend my thoughts to everyone dealing with the war in the Ukraine, and we will continue to support humanitarian efforts to help the affected communities.

Starting with our financial results first quarter revenue of approximately $1 billion to $2 billion increased 12% year over year.

We received a record orders in the quarter with sequencing consumables orders, surpassing $1 billion for the first time.

And we exited the quarter with a record total backlog, a great leading indicator for upcoming quarters.

Turning now to performance across our platforms.

Sequencing instrument shipments grew more than 20% year over year in the first quarter.

We shipped a record number of Nova C and received a record nervously consumables orders demonstrating both strong demand in the instruments six year since launch and addition to our substantial installed base for future consumables revenue.

More than half of <unk> shipments, what your clinical customers and we saw particular strength in oncology testing as high throughput sequencing and comprehensive genomic profiling become increasingly critical to cancer patient care.

And mid throughput the installed base of next week 1000, 2000 instruments has now exceeded 1000.

Additionally, Q1 shipments for the <unk> flow cell that we launched in the fourth quarter of 2021 were nearly double our expectations.

We're seeing strong adoption of the <unk> flow cell from both new customers and customers moving up the throughput spectrum as.

As well as broad kit utilization from existing <unk> users due to the <unk> flow cells efficiency and cost effectiveness.

Our low throughput platforms also continued to perform well and provide a great entry point to sequencing.

More than one third of shipments in the first quarter or to new to Illumina customers further increasing our installed base and enabling adoption of sequencing across a broad customer network.

Looking now at our markets.

<unk> testing sequencing consumables grew almost 20% year over year as we continue to help democratize sequencing in this critical area of health care.

In March we received CE IBD approval for <unk> oncology comprehensive in Europe .

This new in vitro diagnostic comprehensive genomic profiling kit is the first distributed IBD for both DNA and RNA.

DSO comp IBD covers a range of mutations and Biomarkers associated with the European Society for medical oncology guidelines.

Maximizing opportunities to find actionable information from each patient's biopsy.

We're pleased to be early reception and excitement from customers across the EU and we look forward to introducing DSO comp IBD and other markets, including Japan, where we recently applied for regulatory approval.

The DSO comp IBD offering will build upon the incredible expansion, we're seeing globally for <unk> 500, which grew nearly 120% year over year in Q1.

Also in oncology customer and provider interest for gallery grills groundbreaking multi cancer early detection blood test is growing to.

To date gallery has been prescribed by more than 2400 prescribing physicians and Grail has entered into 34 partnerships with health systems employers and insurers who are investing in multi cancer early detection to improve outcomes.

This includes <unk> recent partnership with <unk> 32 health, the combined organization of Harvard Pilgrim healthcare and Tufts Health plan.

<unk> 30 twos two faced pilot of Gallery, Mark Grill first collaboration with a commercial health plan in the U S.

Last week grille also announced a multiyear partnership with Munich re life U S to provide gallery as part of Munich re commitment to advancing cancer early detection and treatment.

<unk> and <unk> will collaborate to enable carriers and distributors to offer gallery to existing policyholders, who are at high risk of cancer, such as those aged 50 and older.

Also the NHS Gallery trial continues to progress with more than 90000 of the planned 140000 participants enrolled.

To support the increasing interest around gallery and to further their R&D efforts. The Grail team has almost doubled in the last eight months to more than 850 employees.

With another almost 250 job openings.

Looking ahead Grail plans to expand its existing sales force for gallery to reinforce launch traction and drive continued market adoption.

Turning to our other markets genetic disease testing had another record quarter as we enable expanding coverage and utilization of whole genome sequencing or WGS globally.

In the U S. Critically ill infants are now eligible for WGS in California, Oregon, and Maryland through Medicaid providing coverage for an additional 17 million lives.

And last week, we announced an agreement with Germany's Hanover Medical school to implement the use of WGS for critically ill children suspected of having a genetic or rare disease.

This project like our collaborations with other children's hospitals around the world helps demonstrate how WGS can support earlier diagnosis and treatment for children in neonatal and pediatric intensive care.

And reproductive health coverage reimbursement and evidence generation continue to increase particularly in Europe , both Spain, and Italy have expanded coverage for noninvasive prenatal testing or <unk>.

With Germany likely doing so as well later this year.

In infectious disease, and microbiology, we saw a record quarter with incremental global investments and pathogen identification monitoring and resistance.

This was driven by Covid surveillance, we are also seeing traction for other pathogens, including tuberculosis.

In March the Milken Institute called for a network of multi sector stakeholders to collaborate on data insights and responses for early disease outbreaks.

In the same month, the World Health organization announced a 10 year strategy to use the power of genomics for global Pan pathogen surveillance.

Demonstrating the growing trend for broader pathogen monitoring.

For example, find a Geneva based global Alliance for diagnostics establish seeking treat a global initiative using sequencing for drug resistant tuberculosis, which affects nearly half a million people globally each year.

We're providing instruments to help seeking treat accelerated discovery for the half of patients with drug resistant tuberculosis, who are not currently successfully treated.

And our research and applied markets, we continue to see genomic research expanding across applications and disease States.

Lab budgets, specifically for Ngls are increasing including for both academic labs growing approximately nine 5% and pharmaceutical and industry labs growing at approximately 14%.

As part of our efforts to support growth in genomic research. We recently partnered with <unk> to provide cutting edge polygenic risk score digital tools to our customers.

With our <unk> software researchers can better identify individuals with high genetic susceptibility for developing a life threatening diseases.

Also in research, increasing utilization and demand for multi omics, particularly proteomics is driving sequencing growth and opportunities.

Our partnership with Soma logic to co develop a high Plex city high sensitivity and high specificity proteomics assay is progressing well.

Together, we look forward to empowering the next generation of novel insights.

Another fast developing area is the integration of multi omics and genomic data into drug development and clinical trials.

Drug development R&D spend is more than a $123 billion annually, yet more than 90% of drugs that enter phase one clinical trials failed to reach clinical approval with fewer than 70 entering the market each year.

The main contributor to this high failure rate is target selection, where genomic based methods can more than double success rates and dramatically improve cost and speed to market.

Because more than 85% of the human proteome cannot currently be targeted pharmacologically. We're excited to support genetic lead discovery and emerging drug modalities that could significantly expand the total number of potential therapeutic targets.

In addition to our partnership with National Biosciences Today, we announced a partnership with Deerfield management.

This first of its kind collaboration will combined illumina genetic and AI led approach to discovery with Deerfield expertise in preclinical and clinical development.

Together, we plan to translate genetic insights into new therapies across diseases with unmet medical needs and drive a step change in the pace and efficiency of drug development.

This will ultimately help more patients access potentially life changing therapies.

And driving sequencing trends to improve human health.

I will now turn the call over to Sam to discuss additional details on our results and outlook.

Sam.

Thanks for insects as a reminder, our first quarter financial results include the consolidated financial results for Grill.

I'll start by reviewing our consolidated financial results, followed by segment results for core aluminum and grill.

Then conclude with our current outlook for 2022.

I will be highlighting non-GAAP results, which 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 in the supplementary data available on our website.

A record first quarter revenue of one $2 billion to $3 billion grew 12% year over year with core aluminum sequencing instruments growing at 20% and sequencing consumables growing at 13%.

Sequencing consumables growth with solid across both clinical and research with both market segments growing in double digits.

For the first quarter GAAP net income was $86 million or 55 cents per diluted share.

And non-GAAP net income was $169 million or one dollar and seven cents per diluted share which include a dilution from grails non-GAAP operating loss of $134 million for the quarter.

Or non-GAAP tax rates was 17.8%, which decreased 250 basis points year over year, primarily due to tax expense recognized in Q1 2021 on certain foreign subsidiary earnings that are no longer indefinitely reinvested.

The increase in the non-GAAP tax rates from Q4, 2021 was primarily due to the impact of R&D expense capitalization requirements implemented by the tax cuts in jobs Act of 2017.

Our weighted average diluted share counts for the quarter was approximately $159 million.

Moving to segment results I will start by highlighting the financial results of core alumina.

Poor alumina revenue grew 12% year over year to 122 $1 billion.

Core aluminum sequencing consumables revenue grew 13% year over year to $784 million driven by the growing Nova sic installed base across clinical and research markets.

Sequencing instruments revenue for core alumina reached a new high growing 20% year over year to $212 million.

This was driven by another record quarter of Nova sic system shipments, resulting from accelerating demand in oncology testing, which accounted for almost 40% of the Nova sic shipments for the quarter.

We also continue to see strong demand for next seek 1000 2000 from new to alumina customers, who represented more than a third of the shipments for the quarter.

During the first quarter COVID-19 surveillance contributed approximately 53 million and sequencing consumables revenue and $7 million in incremental instruments revenue driven by the sustained focus on pathogen surveillance.

Core alumina sequencing service and other revenue of $111 million was up slightly year over year, driven by growth an instrument service contracts.

Moving to regional results for core alumina.

Revenue for the Americas region was $646 million growing 15% compared to the prior year period.

Growth in the region was primarily driven by strength in three key areas first continued sample growth in oncology therapy selection second emerging applications, such a single cell and proteomics and third pathogens surveillance initiatives.

EMEA delivered revenue of $316 million, representing 4% growth year over year.

Driven by strength across both clinical and markets and emerging markets.

Partially offset by the conclusion of the UK Biobank program in the third quarter of 2021 as expected.

EMEA growth was modestly impacted by lower shipments to Russia as a result of the war in Ukraine.

Greater China revenue of $127 million was flat year over year as the region's robust clinical demand in hospitals was offset by COVID-19 restrictions that began in March.

Finally, a P. J revenue of $132 million grew 33% year over year with stronger than expected growth from large scale research projects oncology and genetic disease testing and pathogens surveillance initiatives.

Moving to the rest of the core aluminum P&L core alumina non-GAAP gross margin of 72% decreased 30 basis points year over year <unk>.

New primarily to increase freight costs attributable to broader global supply chain pressures.

For aluminum non-GAAP operating expenses of $505 million were up $85 million a year over year due primarily to headcount growth and investments, we are making an R&D and operations to support the growth and scale of our business.

Despite the year over year increase non-GAAP core aluminum operating expenses for the first quarter, where roughly $15 million lower than we expected as a result of the slower hiring and timing of project spend shifting into the second quarter.

Transitioning to the financial results for Grail Grail revenue of $10 million for the quarter consisted primarily of gallery tests fees.

Rail non-GAAP operating expenses totaled 139 million for the quarter, which consisted primarily of expenses related to head count in clinical trials.

<unk> non-GAAP operating expenses were approximately $15 million lower than we expected, Utah timing of spend shifting to the second quarter.

Moving to consolidated cash flow and balance sheet items cash flow from operations was $172 million.

<unk> was 46 days compared to 49 days last quarter.

First quarter of 2022 capital expenditures were $61 million in free cash flow was 111 million.

And we did not repurchased any common stock in the quarter.

We ended the quarter with approximately $1.4 billion in cash cash equivalents and short term investments.

Moving now to 2022 guidance, we continue to expect consolidated revenue growth of 14% to 16% for 2022, including core alumina revenue growth of 13% to 15% and Grail revenue of $70 million to $90 million.

And we continue to expect non-GAAP earnings per diluted share in the range of $4 to $4 20.

Which includes dilution from Grail of $3.75 and.

In line with previous expectations.

We are reaffirming all other financial guidance for full year 2022, we provided in February with the exception of our consolidated non-GAAP tax rates, which we now expect to be approximately 18%.

Our outlook for 2022 assumes the Lockdowns in China ease by June and our business recovers in the second half of 2022.

For the second quarter of 2022, we expect consolidated revenue to increased 7% to 9% year over year from the second quarter of 2021 <unk>.

Including in approximately 300 basis points headwind on overall revenue growth related to current COVID-19 related shutdowns in China.

We expect consolidated non-GAAP gross margin to be roughly flat sequentially from the first quarter of 2022.

We expect consolidated non-GAAP operating margin to be approximately 10% with the sequential decreased from Q1, 2022, driven primarily by a $60 million increase in core alumina operating expenses and.

And the $25 million, increasing Grail operating expenses.

He expected increase in operating expenses are driven primarily by our typical ramp and compensation related expenses, including our merit increase cycle.

The timing of hiring and projects spend shifting into Q2 from Q1 <unk>.

And the ramp and growls operating expenses.

We expect core aluminum non-GAAP operating margin to be approximately 23% in the second quarter.

We expect the second quarter consolidated non-GAAP tax rate to be in line with our full year 2022 guidance of approximately 18%.

And lastly, we expect diluted shares outstanding to be in line with our full year 2022 guidance of approximately 159 million shares.

I will now have the call back over to France's for his final remarks.

Thanks Sam.

As we look ahead, our business fundamentals remain very strong.

The continued growth in our installed base, our record backlog exiting Q1, and the increasing volumes, we're seeing if customers to pursue higher intensity sequencing applications, all bode well for future growth, especially in the second half of this year.

We also continue to drive increased access and deliver breakthrough genomic innovations.

We're making progress across our innovation pipeline with data and excitement building around our breakthrough chemistry acts are infinity long lead technology in our notice Eek Dx platform.

We will provide additional updates on these technologies in the coming months and we look forward to welcoming thousands of customers from around the world to the alumina genomics Forum in late September .

Also we are pleased to invite you to join US This fall for our Investor day, which will be held Monday October 3rd in San Diego following the alumina genomics Forum.

We will be announcing additional details in the coming days.

Across our global business, we are at the forefront of genomics and healthcare.

Excited to deliver new technologies collaborate with pioneering partners champion patient access and support incredible researchers and conditions around the world as we collectively unleashed the power of genomics for the betterment of human health.

I will now invite the operator to open for Q&A.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

Using a speakerphone. Please make sure your mute function is turned off to allow your signal to retry appointment as a reminder, please limit yourself to one question. So that we can accommodate as many analysts as possible you are welcome terrien re enter thank you. If you have additional questions again pressed Darwin will.

We'll take our first question comes on the line as Dan Pardon. Please go ahead. Your line is now okay.

Great. Thank you thanks for taking the questions.

Maybe a couple of partner just to kick it off.

As in Sam.

First books on China.

10% of your revenues you talked about the headwind in Q2 can you just give us a sense of how it played out for you in queue. One it was flat obviously, a pretty big deceleration just wondering how.

How much China really took away from what you expected and kind of one Q second part of the question is on instruments and consumables for Mgs, you're you're kind of maintaining all your guidance numbers.

Believe you're kind of thinking about 10% human growth I believe 18% consumable goods for the year.

Obviously trend that above that and instruments in Q1, and you will below down on consumables. So just walk us through particularly under consumables.

How how do you is going to play out and was one two impacted whether it be by China and anything else and then the final part of the question is just a GPT, presumably we're gonna get the update on Infinity. There are we going to learn anything new on chemistry exterior that's gonna have to wait for the call. Thank you.

Yes, Hi, Dan Thanks for the questions. So this is Sam I'll start with the first two questions and then I'll turn it over to Francis on the <unk> question. So with regards to China, China was approximately $10 million lower than our expectations in Q1 and that was really all driven by the restrictions.

We saw in March so as you know in March we saw really large significant restrictions in Shanghai basically shutting the whole city down but also we saw restrictions and a number of other cities as well and that got reflected with about a $10 million downside in Q1, as we said in Q2, we expect to 300 basis points headwind on overall.

<unk> company growth in China.

So you know all in all I would say in the first half it's about a 45 million dollar headwind for China.

On on a result, but we are expecting that by June the restrictions start to ease we're already seeing promising things in Shanghai.

Aging I think there is mass testing going on and so we're keeping obviously close to that situation, but we are optimistic that as we get into June and beyond this will start to ease the underlying fundamentals of demand in China really strong backlog as up as we enter into Q2, it's higher than the last two quarters.

Added new hospitals, almost 38 hospitals that we've added into our installed base, we're increasing our penetration in hospitals. The question is really just about restrictions on the ability to get products to customers just given the fact that they.

Shutdowns with regards to your second question on instruments and consumables, Yes, we had a very strong start to the year with regards to the instruments over 20% growth, we said going into the year that this is going to be a more I would say.

Less back end loaded year for instruments, we're going to have a strong start it's going to be more I would say sequentially even in terms of.

Instruments. So we are still reiterating our guide for 10% growth, we had a very strong backlog and we still do going into Q1 and so we are.

Basically shipping and delivering on that backlog as you saw in Q1 with our strong results and with regards to consumables consumables actually we're better than expectations. In Q1. So they grew by 13% they were better than what we expected in Q1, even with the impact of China.

We as you think about Q Q1 think about some of the impacts in Q1 of last year that actually knew that some of the growth.

13%, if you normalize for those things like the UK Biobank in Q1 of 21, which was a 20 million dollar benefits. We had some stalking in Q1 of 21, which was also about a 20 million dollar one time impact if you normalize for those consumables would have grown in the high teens. So we still have a lot of confidence in terms of our.

Guide of 18% and consumables for the full year.

I will turn to Francis Scott down let me take the questions about chemistry accident Infinity. The teams are making really good progress in both.

Strategy is going to be an infinity to have more customer data come out over the course of the rest of the year as we get closer to launching infinity.

And then we had chemistry X you will absolutely have a lot more information.

At the customer event, and then at the Investor events as well and then between now and then to the extent that there is some new material data to show we will bring it out.

Thank you we'll take our next question comes online Afghan ask please go ahead and get your line is now okay.

Yeah, Hi, guys. Thanks for the questions Francis maybe just on a similar vein in a similar vein you mentioned last quarter that the backlog was two extra prior year and you are seeing now here that it's record levels. So presumably the backlog grew.

That's fair.

And then on the pull through right for the Nova seat.

I'm just curious whether you came in in the in the range that you were looking for for the year or did the things that took place in March kind of take you a little bit below and it's it's just a matter of getting back to that range later in the year and then if I could just on grill anything anything new on the European Commission and the timing related to the news around that process. Thanks.

Yeah, maybe I can jump in Dan and take the first question on backlog.

So we have talked about the fact that the instrument backlog was record going into Q1. It was double the backlog that we saw starting last year with regards to overall backlog. It also has a record in Q1, so let's be clear on what the components are.

So we had record overall backlog in Q1 <unk>.

<unk> Q1, so definitely the overall backlog grew but I think the double was really more relating to the instrument backlog.

So with regards to novaseq pull through.

Let me continue for that so we are still expecting pull through to be in the range of 12213. So we are expecting that as we get first of all we've had incredibly strong placements for Nova sic. We at Q1 was a record shipment quarter for an oversee.

As we get more and more installed base expansion and we got more shipments into an oversee as you know it's going to take usually it takes about a quarter or two for those customers to ramp up to their usual pull through but we have every confidence that we're still going to be in the.

And that 12213 pull through range for the year and then let me pick up on the question around Grail and timing with the European Commission.

As you know we are engaged in two processes in Europe . One is with the European Commission on their face to review, we continue to be engaged with them. The clock is paused as we are working with them to see if there are remedies that could get this deal approved.

We expect a decision on that to come either later in Q2 and Q3 were also engaged with the the EU General Court as we walk through the jurisdiction of the European Commission to review this deal and we expect a decision on that similarly to come either later in Q2 or.

Q3.

Thank you I'll I'll take our next question comes on the line and Derek right. Please go ahead in New Orleans now okay.

Great. Thanks for taking my question is microeconomic Derek.

I want to follow up on the instrument strength.

And the quarter.

Then another really really good results after a strong run in 2021.

I'm sure you know.

Increasingly more <unk>.

Product launches coming.

In a space from a number of competitors some have already launched during the process of launch any more or less as we speak I'm just wondering how.

That showed up in any of your conversation with prospective customers.

Are you are you competing more with any of these head to head.

Coming in when you when you are having pricing conversation with them are sort of in a committed contract or anything like that I'm. Just wondering if that's shown up on the margin, especially in the middle part of the portfolio.

Yeah, and then I'll start by saying that overall, we believe that the genomics market is a large and growing market that we're in the very early stages of penetrating and so.

As we've seen before and will continue to see there's room for growth of multiple players in this market.

And and we expect that to be true for for a long time going forward.

The customers resale too are among the best and brightest in the world that obviously aware of the options that are out there and we do have those conversations and so all our customers I think are very well informed about what the landscape looks like who's available, what's coming and what to expect from the different vendors. So they are absolutely part of those conversations.

You see the strength, though in in the numbers, we put up right you saw the 20% growth in Q1, you saw the strong orders of strong shipments.

Especially see the strength and.

Areas like noticed seek for example, where we had a record year last year, we had record Q1 in terms of shipments.

And that continues to be because whether it's at the high end of the portfolio in the next seat line or even at the smaller end of the portfolio. We continue to provide a superior value proposition that is meeting the needs of customers in terms of total cost of ownership in terms of performance in terms of price points and that's frankly the job we have to continue to do with it.

<unk> and our customers business by making sure that that continues to hold true.

Thank you, let's take our next question comes on the line of <unk>. Please go ahead. Your line is now okay.

Hey, guys good evening and thanks for the time <unk>.

Francis I'll I'll ask a two part are one on Grail and one on a competitive dynamics similar to the prior question. There. So you know you do.

At about $10 million in revenue, you're still expecting about $80 billion from growl at the midpoint, so fairly steep ramp to the rest of the year.

Can you shed some light on what what sort of the uptake rate within the patient population you heard that showed a zooming for gallery in terms of your current health system, an employer partners and then on the competition.

Some of the emerging competitors your talk of mid single digit price four GB sort of price points on their medium throughput instruments do you see yourself as having sort of enough flexibility to go lower perhaps you know at the high end of the portfolio 100 to 200 dollar genome or do you see you know enough daylight in terms of.

Specs.

Still be very competitive and stay the preferred vendor for your customers.

Yeah, let's take thanks for those questions, let's take them one at a time, we are pleased with the way <unk> performing so if we look at the traction that they caught in Q1, not just the $10 million in revenue, but if you look at the attraction they've made also with increasing the number of prescribing physicians to 2400.

Increasing the number of partners across health systems, employers and insurers and up to 34.

<unk> continued to be on track to meet the revenue outlook that we laid out at the beginning of the $70 million to $90 million.

The other things that they've put into place that we know will pay off over the course of this year and uncertainty going forward.

Signing up first the first commercial.

Aaron's provider here in the USA point 32, that's going to be exciting both as a as an employer tough.

Customer of theirs, because they're going to build a that internally and then obviously as those they roll it out to their customers. The other exciting development was the Ah them signing up their first life insurance company and that we think with with mean agree that we think is a.

A good start in a segment that we think is a lot of potential.

Four four of <unk> going forward and so good traction there and then maybe a little bit longer term. We're also excited with the progress that grill is making with the NHS.

But they have they are now up to 90000 enrolled participants you will recall that had a target of 140000, so they're making good progress.

Which then brings us one step closer to the next phase of the NHS, which would be expanding this to a million people in the UK. So good progress all around feel like we're on track to to meet the plan that we laid out at the beginning of the year.

In terms of competition.

We still feel like we have headroom in a number and a number of ways. One when we talk to our customers. They look at the total cost of ownership of a system.

So the price per G. As one part of the equation, but then you have to look at things like the compute infrastructure and if you look at what we've got in the next week for example, or the Novus leagues that extends well beyond just core sequencing you've got advanced compute on board with the instruments with the FPGA arrays glitch or other.

Sequencer as you would have to go out and buy that type of commute. In addition, we have things like the lossless data data compression algorithms built in some customers can achieve a five X reduction in the amount of data at the required to be stored and so that's another part of the Tcl equation that customers look at when they come.

Our systems, we have compared to our systems and so price per G. As one part of the equation you add all of those other things and you start to it starts to add up just how good the value of getting from from illuminated having said all that we also have a lot of headroom in terms of continuing to drive the price per G down.

You've you've heard us talk.

Talk a lot about the innovations that we've got in the pipeline and the kind of headroom that gives us as we look forward both on new instruments and potentially an existing product lines too. So we definitely have a lot of gas and both of those tanks right. One is on the end to end Tcl comparison, where we have a very strong proposition.

But then also taking each of the components in continuing to drive the price down because of the technological innovation that puts us on dramatically in the U S curves.

Thank you we'll take our next question from the line of <unk>.

Next time. Please go ahead your line is now okay.

Hey, guys. Thanks for taking the questions. So congrats on the quarter I appreciate that we'll be hearing and seeing more about the the new products in the near term, but specifically when should we expect to hear some commentary around the chemistry economics, and maybe just to establish a benchmark.

20th, 25% lower pricing B, a reasonable expectation that's 20 to 25.

Second question about right.

Understand the Biopharma My Murdy collaboration revenue represents a portion of the girl revenue guidance, but with respect to the.

The gallery revenue significantly does the guidance assume most of the clinical trial revenue like you were kind of notion Frances and I, and and NHS stomach et cetera, or actual diagnostic revenue like in a mountain alignment et cetera. Thanks.

Alright, So let me take the questions one at a time, so chemistry ex will continue to give you technical updates as they come available in the economic economics update will really depend on the instrument that we that we put chemistry accident, because it will be different because ultimately the economics of an instrument depend.

On the new chemistry, but also every other part of the instrument drive the optics that we put in there the flow cells that you put in there the compute infrastructure and so chemistry X will be definitely a heavy contributor to superior economics, and an instrument, but to tell you the overall it.

We'd have to we'd have to lay out the entire configuration of an instrument and then you can share with you with that instrument would give you I can tell you right now that frankly, 20% to 25% would be well below if you think about the and the roadmap of a new chemistry right. If you look at look at what we got with the last generation of chemistry excellent Celexa came out in 2007.

The project got from them is $150000 to lunch to do a genome today's lesson 600, right. So that chemistry. If you look at the lifetime of that chemistry, Nah I don't Wanna give all the credit just to the chemistry, because obviously they were innovations again in optics and data pads, and compute and and everything associated with that but.

Very very significant roadmap in terms of price reductions that were enabled so this is the most significant update we've done in chemistry since the original SBS was invented and so you should think about the lifetime of this chemistry is giving us a lot of headroom in terms of performance, but also in terms of price reduction.

So I would be personally disappointed if over the lifetime of this chemistry, you would just thinking about a 20% to 25%.

Reduction second.

Secondly, there to talk about growth so the grilled revenue for the year.

What we said.

We affirm is that the majority of the grilled revenue for this year will come from testing there will be a component that comes from their farmer partnerships, but it won't be the majority of their revenue and that and that's what they are working towards on the planet.

Thank you and we'll take our next question from the line of David Westin Pardon. Please go ahead. Your line is now okay.

Okay.

Got it got it got hit the mute button.

Hi.

See what the point of a cost per G. In competition I realize maybe maybe just getting a little bit old, but it didn't get my specific like Sade or thought process, a specific question and that would be.

The mid through point is definitely crowded you know you've gone on at length about the <unk>.

Competitive.

Labourers you have the polling that when we're talking about the high throughput market you know somebody who's catching you in price per G or even higher than that you know how comfortable do you feel that you know in high throughput range of competitive launch would not be that detrimental to you.

And should we use B G. I as an example, and hopefully this is a quick question for my my follow up here for for Sam and that is.

The cash flow generating cancer labs are in cost cutting mode.

The conversation around investment and sequencing instruments came up as part of the <unk> part of that cost reduction and thank you.

Great. Thanks for that question, let me start with the first one which is.

We have always had to compete in the high throughput environment in respect to continue to announce start by saying that the genomics market as a whole as I said earlier is a large and growing market that is that's in the early stages of penetration and so we expect there'll be vendors that emerge there'll be vendors that.

Okay.

Go away, but we expect that there will be competition in that space and that's where we built into our plans.

Having said that I.

I am also very confident in our competitive posture in that market today and extraordinarily excited by the roadmap that we have in terms of enhancing that competitive posture and I'll start again, what I said it over the area, which is when you think about you know even just the cost element. It's really important that you think about the.

The total cost of ownership, especially on the high throughput side, when you're generating so much data the compute costs the the storage costs.

The end to end workflow costs all of that become very important and so when you look at the levers of innovation that we have not just to continue to drive the performance and price points associated with the core sequencing, but the levers we have around the end to end workflow we have a terrific.

<unk> to offer a very strong value proposition and that high throughput market.

And then the second question is I have cats. So thanks for the question. The short answer is no, but I'll explain why that is not the case that we're seeing any cost cutting on sequencing.

When you think about our customer universe, we've got about 8000 customers.

Incredibly diversified customer base, but if you think about the commercial labs clinical customers. I mean sequencing is part of what drives revenue for them. So really all the demand is driven by the end markets and it's really driven by the need for testing and the fact that we're seeing very robust demand driven by robust reimbursement market.

And utilization in markets in oncology or genetic disease testing. So no we're not seeing any slowdown driven by cost cutting because I think it's really driven by and demand.

On the research side.

We're still seeing very strong funding to the research market.

Whether it's again into research in oncology research and genetic disease or research and pathogens surveillance and other initiatives. So I think the short answer would be no, but hopefully this gives you a bit of colour y.

Can kill we'll take our next question from Atlanta Penny Sarah. Please go ahead take your line that's now okay.

Yeah, Hi, Frances.

Taking the questions. So.

Based on what you were saying about chemistry accident potentially the newest women can extract in chemistry.

This should take you $200 genome well beyond that so.

Can you talk about what applications to start to open.

Duction that is well above 25% a type of reductions that you're talking about.

And what does it do to the maybe what does it do to the diagnostic mix of the customers will you longer term as well I think they're cleaning around us so.

Nearly 60% of the sequencing consumables, so maybe just help us understand on the applications and where.

The diagnostic customer's going going just a quick follow up on it.

How much was pricing contribution in the quarter ominously pricing contributing the quarter and what should we expected to do for the year and the guys. Thank you.

Yeah.

There is a lot that can open up as we continue to drive the prices of sequencing down because the reality today is that we are still at the very early stages of understanding how a genome translates into human health and human disease, we've unlocked the first clinical applications.

Cancer therapy selection, but there are many many many many more that that we know will emerge once we're able to do the experiments of the size that we need to do for example, if you look at complex diseases like neurological conditions, whether it's autism schizophrenia.

Or Alzheimer's or Parkinson's.

But we're hearing from the research community of that.

If you look at schizophrenia for example in families. It's clear that there is a jeanette in genomic component to it but it is complex causality, there and the only way you can unravel the biology is by running cohorts that are not measured in the thousands or even tens of thousands but are much bigger than that and so there's a huge amount of promise.

To uncover and address some of the genomic underpinnings of neurological conditions, but we need cohorts much much bigger than we've seen historically and that's those are the kinds of experiments similarity when you think about what we need to understand about.

Single cells, and the heterogeneity expression across the cell across the human body. There are tens of trillions of cells in the body. So if you want to do even just a representative statistically representative experiment you don't need to thousands of sounds like equal or doing today unique sizes in the millions or tens of millions and we need to.

Understand that and so those are the kinds of experiments that were getting pushed on and say look if you can just keep driving the prices down. It just opens up the large research areas, which then will translate into a future area of new diagnostics, new screening modalities as well as new therapeutics and so that though.

Other kinds of big Big market that get opened up today, if you look at the top 10.

Causes of death for for mankind.

Genomics helps address cancer one of those top 10.

The reality is that if you play the south a decade, maybe longer genomics is going to help us address all 10, but to really understand the biology, we need an enormous amount of research to be done and then we need an entirely new setup diagnostics screens and therapeutics and so that that's what gets enabled yeah. Anthony thanks for the question on price.

So maybe just.

Walk you through what we what we do typically which is and this is what we did in in Q1, which is very consistent with what we've done in past years, we usually take Ah I would say a low single digit price increase on some of our products not all of our products. It's mostly on the reagents side and also on library prep.

And as I said, it's in the low single digit this is very consistent with what we do every year.

So it has some impact on the full year, it's embedded within the guidance that we've given.

But but it's nothing unusual compared to past years, we have not done anything that's significant.

Significant inflationary price increase that we passed onto our customers. We have not done any freight increases at this point. So we've done our typical price increase that we do in Q1.

Thank you we'll take our next question from the line is Patrick Donnelly. Please go ahead. Your line is now okay.

Hey, guys. Thanks for taking the questions for.

<unk>, maybe one of the clinical market you know obviously the momentum there continues to build really strong numbers could you just talk about where you're seeing the most strength underlying there and then obviously.

We've talked a little bit about the competition you know how confident you are and then kind of your positioning there may be some some more people come after the clinical side.

Yeah the.

We are seeing.

Real strength across across the board in the clinical market. So.

If you look across regions, we're seeing a huge amount of strength, obviously in America, and so on but even even in in China, where we talked about the COVID-19 restrictions, we still had strong momentum in the clinical market and signed up as Sam pointed out 38, new hospitals as well so what's driving that.

One of the biggest drivers of that is oncology testing for therapy selection.

The coverage that's been put in place for that the move.

<unk> smaller panels to comprehensive generally profiling that requires larger panels now people looking at clinical <unk>.

That's driving a huge amount of strength and <unk>.

You look at a number of our metrics, whether it's the consumables that are being pulled into that market or even the <unk>. We saw for example.

I think it was about 40% of our notices that were shipped in Q1 went to oncology testing customers and.

So I would start by saying that oncology testing for therapy selection as a juggernaut that drove a lot of our growth and the clinical markets last year, it's continuing to play out this year because a lot of the Ah.

A lot of the underlying demand drivers are still strong. We also saw though strong demand in genetic disease testing.

And that had another strong quarter in Q1, and some of the similar dynamics are playing out there the dramatic expansion and Ah and coverage over the last couple of years is really helping fuel that demand. In addition, you know that those applications are sequencing intensive application so you're talking about.

Clinical whole genomes, you're talking about trios were those are available and so that is continuing to to fuel some of the brand in in.

In the clinical markets that we are seeing.

And that has a lot of headroom in front of them both of those markets.

The clinical market actually is.

One market as a market, where I think we have a special strength right because we have established over the last decade.

A a number of things that customers really like so for example, we have cleared boxes <unk>, which got clearance in 2013, but also now we have the next week Dx that's available to customers and we are marching down the path to deliver a noticing.

That puts us in a unique position at this point is that if you want to develop on a clear box.

A really great choice for Ya. In addition, we have some into and work clothes that are really exciting to our customers. Tso's 500 is a fantastic products and we talked about the fact that if you look at Q1.

Tfl 500 had really really strong growth growing over 100% from the previous Q.

Q1 and.

And then we're also continuing to see demand for R. Vers Eek niet end to end workflows, so again that positions us, especially well against against anyone else who is looking for in terms of customers looking for cleared workflows that they can buy and use and then even customers that are running in LDP mode.

They have spent a long time developing their own validated workflows on our instruments and if they're using our.

Non dx instrument, but it's taken them a long time to build up their validated workflows and and to bring those to scale and so.

From their perspective, it's it's a better thing in terms of running their lives to just continue to expand the relationship with aluminum.

And so those are some of the dynamics in that space.

Thank you we'll take our next question from the line of you take her mind. Please go ahead. Your line is now okay.

Oh, hi, Thanks for taking my question.

Just one Sam on.

The guidance here for two Q I think at the midpoint.

Eden backing out the 300 basis points impact from China locked down and I think it's 1.25 billion. That's below Street models, maybe talk a world.

Any.

Cadence issues is that accomplished street modeling you should talk about the <unk> guide and now and then.

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