Illumina Inc (ILMN) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2021 Illumina Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would like to now pass the conference over to Salli Schwartz, Vice President of Investor Relations.

Good afternoon, everyone, and welcome to our earnings call for the fourth quarter and full year 2021. 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.com.

Participating for Illumina today will be Francis deSouza, President and Chief Executive Officer; and Sam Samad, Chief Financial Officer. Francis will provide an update on the state of Illumina's business; and Sam will review our financial results, which include GRAIL.

As a reminder, pending the outcome of the European Commission's investigation into Illumina's acquisition of GRAIL, the commission has adopted an order requiring Illumina and GRAIL be held and operated as distinct and separate entities for an interim period. Compliance with the order is monitored by a monitoring trustee. During this period, Illumina and GRAIL are not permitted to share confidential business information unless legally required, and GRAIL must be run independently, exclusively in the best interest of GRAIL. Commercial interactions between the 2 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.

It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K.

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

Thank you, Salli. Good afternoon, everyone. I'm excited to share with you how our commitment to innovation is driving growth and unlocking the power of the genome. My comments will cover a few key areas, starting with our strong finish and exceptional results for 2021, followed by how our platforms and markets drove those results. I'll then conclude by highlighting a few of the many trends that will support our momentum and continued growth in 2022 and beyond.

Let's start with our financial results for both the fourth quarter and full year 2021. Fourth quarter revenue of approximately $1.2 billion increased 26% year-over-year with strong growth across both instruments and consumables and across all regions. Full year 2021 revenue of more than $4.5 billion increased 40% year-over-year, reflecting 76% growth in sequencing instruments and 43% growth in sequencing consumables.

We're seeing record demand for our instruments across the throughput spectrum and across geographies. In 2021, we shipped more than 3,200 sequencing instruments and added more than 930 new instrument customers, over 50% more than in 2020 or 2019.

Delving now into each of our platforms, starting with high throughput. We shipped 384 NovaSeq units in 2021 with more than 1/3 of those instruments for oncology testing. Approximately 50% of NovaSeq orders in 2021 were to new to high throughput or new to Illumina customers. 2021 NovaSeq consumable pull-through of more than $1.3 million per instrument was the highest ever average even with over double the placements compared to last year.

Moving to mid-throughput. In 2021, we shipped more than 1,100 NextSeq system, surpassing 1,000 for the first time and nearly doubling 2020 shipments. This volume was driven by growing NextSeq 550 demand in clinical applications like oncology testing and reproductive health as well as NextSeq 1000 and 2000 demand as customers expand into multi-omic applications. More than 20% of NextSeq 1000 and 2000 units this year were placed with new to Illumina customers as we continue to see new customers using higher throughput applications.

For low throughput, in 2021, we shipped more than 1,600 units, another record, driven in part by the addition of more than 700 new customers.

Looking at our continued strong growth through the lens of our market. Our clinical markets currently include testing for oncology, reproductive health and genetic disease. In 2021, our consumable shipments to clinical markets grew 42% driven in particular by oncology testing where many customers are building out comprehensive genomic profiling, or CGP, and expanding into liquid biopsy and monitoring.

We continue to see expanding opportunities for our oncology products globally, including new studies launching in Europe and Asia, with our research-use only TruSight Oncology 500 assay. For example, our recent joint research project with the National Cancer Center Japan will develop personalized cancer treatments for patients with nasopharyngeal carcinoma, a cancer that occurs more frequently in Asia. And our partnership with the Jean Perrin Center at the Clermont-Ferrand University Hospital in France will assess the clinical value of CGP in patients with late-stage disease compared to the current standard of care.

Also in oncology, GRAIL continues to see strong momentum. GRAIL launched the Galleri test last year as the first clinically validated, multi-cancer early detection test to be available to patients and providers. Galleri can detect more than 50 types of cancer, most of which have no current screening. It's great to see the initial market reception with multiple large employers and payers adopting Galleri and more than 1,500 prescribing partners, including participation from leading health systems like the NHS, the Mayo Clinic and the Cleveland Clinic. The team continues to collaborate with pharmaceutical partners like AstraZeneca, Amgen and Bristol Myers Squibb on potential new innovations in the post diagnostic space.

Finally, the recent initiatives launched in the U.S. and EU to beat cancer are very encouraging. The U.S. Cancer Moonshot national initiative and Europe Beating Cancer Plan highlight the increasing recognition of early detection as a critical component in the fight against cancer. Illumina is deeply committed to supporting all early detection, oncology testing and treatment initiatives to improve care and save lives.

Beyond oncology, reproductive health also had a strong year in 2021. This was driven in part by revised American College of Obstetricians and Gynecologists, or ACOG, guidelines enabling genetic testing coverage for all U.S. pregnancies as well as increasing adoption of our VeriSeq NIPT v2 product globally.

Our third clinical market, genetic disease testing, saw tremendous growth and additional evidence generation in 2021, with significant publications in both the New England Journal of Medicine and JAMA Pediatrics affirming the clinical utility of whole genome sequencing, or WGS, for critically ill children. In 2022, we're already seeing an increase in coverage with California, Oregon and Maryland Medicaid initiating coverage for WGS in the NICU setting. Expansion of programs for WGS in NICU settings are also occurring globally, including our recent project with Germany's Hannover Medical School to implement the use of WGS in NICU patients. This program contributes to a growing body of evidence from other countries, including the United Kingdom and Australia, as well as in states across the U.S., showing that WGS offers significant benefits for diagnosis of genetic disease in critically ill infants, along with cost efficiencies for health systems.

Turning to our research and applied markets. Consumables grew 43% in 2021 driven by projects like All of Us, along with ongoing COVID surveillance efforts, that contributed approximately $220 million in total revenue.

I'd now like to spend a few minutes on 3 key trends that will drive long-term growth. First is the continued deepening and expansion of Illumina's addressable markets. We're seeing further penetration of our existing markets through increased access and adoption. The use of sequencing is proliferating globally across applications, and new initiatives continue to integrate genomics into national health care systems. Our technology and genomics expertise are enabling programs like Our Future Health, the U.K.'s largest-ever health research program that will deliver genetic analysis of DNA samples from up to 5 million volunteers. This data will be used for a variety of potential discoveries, including new signals to detect diseases earlier, new ways to better predict high-risk population for diseases and new personalized therapies or tools to delay diseases or change the course of their progression. We're excited to play a role in this project as the genotyping partner for the program.

We also continue to support a growing global COVID surveillance network that will extend to broader pan-pathogens and genomic epidemiology work. This infrastructure is already being used to study other infectious diseases. For example, in South Africa, Dr. Tulio de Oliveira's team at CERI, the Centre for Epidemic Response and Innovation, is using their fleet of sequencers to study other communicable diseases like HIV and malaria. We expect additional opportunities for epidemiology applications in the future as global funding for pathogen surveillance and research expand.

Our new sequencing applications and opportunities are growing and evolving rapidly, including in multiple nascent spaces like multi-omics and drug development. We're supporting the spectrum of multi-omic applications across our instruments, including proteomics, where our codevelopment partnership with SomaLogic is off to a strong start. We're also catalyzing growth in drug discovery where genomic-based methods can dramatically improve speed to market, success rates and costs.

In addition to our partnership with Nashville Biosciences, we're collaborating with the Montreal Neurological Institute Hospital, Takeda and Roche to enable large-scale analysis of patient data and identify promising targets for drug development in neurological diseases. Programs like Our Future Health, growing applications and increasing global access will support long-term adoption of NGS. The new markets we're opening like drug discovery will further enable adoption while also improving data equity and the integration of genomics into health care. We're experiencing this increasing demand for genomics as we enter 2022 with our instrument backlog almost twice the size it was entering 2021.

A second trend is the multifaceted growth in our customer base. Our existing customers are growing their instrument fleet. We're also seeing increasing numbers of customers new to Illumina. As a result, our installed base has grown to more than 20,000 instruments at the end of 2021.

The third trend is the demand for even greater data generation. In 2021, an average Illumina high-throughput customer generated approximately 4x more data than in 2017. This will continue as customers need more complete genomic information and as NGS becomes standard in clinical setting. These shifts will increase the number of projects, number of samples per project and the depth of sequencing per sample as multiple tests are run per patient and as samples are used for reads across high-intensity applications like multi-omics.

This demand for higher throughput sequencing will, in turn, continue to drive further growth in our sequencing consumables revenue. For 2021, between our consumables and services, more than 80% of our revenue is recurring in nature. This more predictable and profitable revenue stream provides a tremendous base to invest into the business and drive future growth.

Illumina's 2021 performance and significant momentum entering 2022 demonstrate our strong position to support our customers and partners as these trends accelerate genomics in health care.

I'll now turn the call over to Sam to highlight additional details on our results and operations as well as discuss our guidance for 2022. Sam?

Thanks, Francis. As a reminder, our fourth quarter financial results include the consolidated financial results for GRAIL. I'll start by reviewing our consolidated financial results, followed by segment results for core Illumina and GRAIL and conclude with our outlook for 2022. I will be highlighting 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 in the supplementary data available on our website.

Our record fourth quarter revenue again exceeded our expectations due to continued strength in our core business, with consolidated revenue growing 26% year-over-year to $1.198 billion.

For the fourth quarter, GAAP net income was $112 million or $0.71 per diluted share, and non-GAAP net income was $117 million or $0.75 per diluted share, which included $0.66 of dilution from GRAIL operating losses and $0.09 of incremental dilution from the 9.8 million shares issued to fund the GRAIL acquisition.

Our non-GAAP tax rate was 15.6%, which decreased 280 basis points year-over-year, primarily due to a more favorable mix of earnings in jurisdictions with lower statutory tax rate. Our weighted average diluted share count for the quarter was approximately 157 million.

Moving to segment results. I will start by highlighting the financial results of core Illumina. Core Illumina revenue grew 25% year-over-year to $1.193 billion driven by another quarter of record shipments for both clinical and research with notable strength in oncology testing, genetic disease testing and population genomics. Core Illumina sequencing consumables revenue grew 32% year-over-year to $792 million driven by record NovaSeq consumables shipments resulting from the significant growth in installed base and strong pull-through that again exceeded our guidance range.

Sequencing instruments revenue for core Illumina grew 35% year-over-year to $191 million driven by record NovaSeq shipments due to continued new to high-throughput customer adoption and accelerating demand in oncology testing. NextSeq 1000, 2000 shipments also reached a new high in the quarter, and there was strong growth across all mid- and low-throughput systems year-over-year. We are entering 2022 with a strong sequencing instrument backlog that is almost double the backlog entering 2021.

Revenue from COVID-19 surveillance again exceeded our expectations driven by the sustained focus on variant tracking due to the emergence of the Omicron variants. During the fourth quarter, COVID-19 surveillance contributed approximately $42 million in sequencing consumables revenue and $8 million in incremental instrument revenue. Core Illumina sequencing service and other revenue of $106 million was flat year-over-year as revenue growth from instrument service contracts and lab services was offset by lower IVD partnership revenue.

Moving to regional results for core Illumina. Revenue for the Americas region was $619 million, growing 25% compared to the prior year period, driven by clinical demand in oncology testing, strength in genetic disease research for pharma and population genomics initiatives like All of Us, and COVID surveillance testing. EMEA delivered revenue of $350 million, representing 23% growth year-over-year, driven by strength in emerging markets, population genomics initiatives and COVID surveillance testing. Greater China revenue was $121 million, representing growth of 26% year-over-year due to continued clinical strength in the region driven by the growing installed base in hospitals. Finally, APJ revenue of $103 million grew 34% year-over-year driven by record NovaSeq placements and continued momentum in clinical markets, including genetic disease testing and oncology testing.

Moving to the rest of the core Illumina P&L. Core Illumina non-GAAP gross margin of 71.6% increased 470 basis points year-over-year due primarily to increased fixed cost leverage on higher volumes.

Core Illumina non-GAAP operating expenses of $580 million were up $141 million year-over-year due primarily to headcount growth, increased performance-based compensation expenses, higher onetime partnership-related expenses and increased project spend driven by investments we are making in R&D and operations to support the growth and scale of our business. Non-GAAP operating expenses for the quarter were higher than expected due to higher variable compensation expense and higher partnership expense compared to previous expectations.

Core Illumina non-GAAP other expense of $8 million was $28 million lower than other income in Q4 2020 due to lower interest income on short-term investments liquidated to fund the GRAIL acquisition as well as interest expense on the term notes issued in Q1 2021.

Transitioning to the financial results for GRAIL. GRAIL revenue of $10 million for the quarter consisted of Galleri test fees and MRD partnership revenue. GRAIL non-GAAP operating expenses totaled $131 million for the quarter, which consisted primarily of expenses related to headcount and clinical trials.

Moving to consolidated cash flow and balance sheet items. Cash flow from operations was $282 million, DSO was 49 days compared to 50 days last quarter driven by revenue linearity, fourth quarter 2021 capital expenditures were $70 million and free cash flow was $212 million. We did not repurchase any common stock in the fourth quarter. We ended the quarter with approximately $1.3 billion in cash, cash equivalents and short-term investments.

Moving now to 2022 guidance. We expect full year 2022 consolidated revenue to grow 14% to 16% to approximately $5.16 billion to $5.25 billion. We expect full year 2022 core Illumina revenue to grow 13% to 15% to approximately $5.11 billion to $5.2 billion. GRAIL expects its revenue to be in the range of $70 million to $90 million for 2022, consisting primarily of Galleri test fees.

For fiscal 2022, at the midpoint of our revenue guidance range, we expect core Illumina sequencing revenue to grow approximately 15% year-over-year driven by accelerating demand in our base business. This includes the intercompany sales to GRAIL of approximately $25 million, which are eliminated in consolidation.

We expect core Illumina sequencing instrument growth of approximately 10% year-over-year driven by continued strength in NovaSeq and NextSeq placements. We expect core Illumina sequencing consumables growth of approximately 18% year-over-year driven by our growing instruments installed base and strong utilization by our customers. We expect the strength to expand our platform, and we are raising our pull-through guidance for NovaSeq to a range of $1.2 million to $1.3 million per system for 2022.

We expect pull-through for NextSeq 1000, 2000 in the range of $130,000 to $180,000 per system in 2022 and pull-through for NextSeq 550 in the range of $100,000 to $150,000 per system. For MiSeq, we expect pull-through in the range of $35,000 to $45,000 per system. And for MiniSeq, we expect pull-through in the range of $20,000 to $25,000 per system. We also expect revenue from COVID surveillance in the range of $130 million to $150 million in 2022.

We expect consolidated non-GAAP operating margin in the range of 15.5% to 16%, and core Illumina non-GAAP operating margin of approximately 28% for 2022. We also expect the consolidated non-GAAP tax rate of approximately 19%. We expect consolidated non-GAAP earnings per diluted share in the range of $4 to $4.20, which includes dilution from GRAIL of $3.75, including GRAIL operating loss dilution of approximately $3.25 and incremental dilution of approximately $0.50 from the 9.8 million shares issued to fund the GRAIL acquisition in line with previous expectations. And finally, we expect diluted shares outstanding for fiscal 2022 and to be approximately 159 million shares.

For the first quarter of 2022 for consolidated Illumina, we expect revenue to increase 10% to 12% year-over-year from the first quarter of 2021. This represents a sequential increase from the fourth quarter of 2021, reflecting a strong start to the year. We expect non-GAAP operating margin to increase approximately 300 basis points sequentially, primarily due to a decrease in operating expenses. We expect non-GAAP tax rate to be in line with our full year 2022 guidance of approximately 19%. We expect diluted shares outstanding to be in line with our full year 2022 guidance of approximately 159 million shares. For core Illumina, we expect non-GAAP operating margin in Q1 to be in line with our full year 2022 guidance of approximately 28%.

I'll now hand the call back over to Francis for his final remarks.

Thanks, Sam. To close, I'd like to thank our teams, our network of partners and the extraordinary scientists and clinicians we serve. I am incredibly excited for the many opportunities ahead.

Today, more than 1 billion people are covered for genomic testing globally, and we expect this number to double within 5 years as genomics accelerates the adoption and potential of personalized medicine. Illumina will continue to support the growing number of patients around the world, accessing the life-saving benefits of genomics from oncology therapy selection, to reproductive health, genetic disease testing and pathogen surveillance. We will also continue to push genomics to new frontiers like drug development and proteomics.

Additionally, we will enable discovery across these existing and new markets with a pipeline of innovative products and solutions developed in collaboration with our customers. It has been fantastic to see the strong interest and excitement across our customer base for our latest developments, including our breakthrough Chemistry X and our Infinity long-read technology. We expect to not only directly address unmet market needs but also revolutionize which scientists and clinicians can expect form sequencing. Together, we're enabling genomic-based discoveries that can transform health care and ultimately provide a brighter future for human health.

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

(Operator Instructions) Our first question goes to Dan Brennan with Cowen.

Congrats, obviously, on the quarter. So I wanted to ask a question on the new products. Obviously, we're going to hear a lot more about this, this fall. But you would expect there's material interest in Chemistry X and Infinity, particularly in light of some of the expected competitive launches that will be coming between now and around HBT.

So I'm just wondering, you've laid out some basic metrics on read length accuracy and speed and you talked about revolutionizing things and unmet needs. So I was hoping, Francis, that you could provide a little bit more color about maybe how we can think about these products? Obviously, you're not going to give us new [factors] at this point but particularly around some of the unmet needs that might be addressed and/or this idea of revolutionizing things because, arguably, Illumina has done a terrific job evolving their product portfolio, driving higher throughput, lower prices. But revolutionary sounds like a pretty big word for this product so just wondering and hoping to trying to get some more color.

Yes. Thanks, Dan. And it has been fantastic, as I said, to see the reaction of our customers to both Chemistry X and the data we've provided so far on Infinity. So let me go through each of them a little bit. With Chemistry X, we've been keeping all of you in the loop over the years as we moved from the research phase then into product development and shared some of the early data maybe just over a year ago. And then as I said a couple of weeks ago, we're now moving Chemistry X from product development into manufacturing with the whole new manufacturing facility and sort of scaling up production. So it's been terrific to see the progress and the innovations that are in Chemistry X. As I said, this is a from-the-ground-up rethink of our chemistry, probably the single biggest advance in our chemistry since Solexa was created all those years ago.

What this means for our customers and in terms of the industry is we can expect a step change in terms of the speed of the chemistry, and that will translate into much faster turnaround times for the tests that our customers are running. And that's especially relevant for not just very large-scale research projects but especially relevant in clinical settings where you do want to get some of those results to patients more quickly. It means higher accuracy. And all of that combines to also enable a really exciting road map in terms of price per G. And we've talked about the fact that we continue to be committed to really driving down the cost of sequencing, to make it more accessible. And Chemistry X, a fundamental part of that. And so we're now entering manufacturing, and we're closer to bringing that out into products than we've ever been.

I've talked about the fact that this is going to be foundational to all new products coming out. And there's no reason, as we look at our existing portfolio, why it may not make sense in some parts of our portfolio to have it in there as well. In terms of Infinity, the excitement there is because we've sort of rethought how people think about long reads and short reads and, again, went back to first principles to say what customers don't want is they don't want 2 different platforms: 1 for short read and 1 for long read. And what they're telling you is that they want to take some of the best elements of what we've got in SBS, high accuracy, low cost, low input requirements and apply that to all reads.

And so when we looked at how we would rethink long reads, we brought some of the best of those elements and to say low input requirements, lower cost, maintain high accuracy. And they also want it to be a single molecule approach. They didn't want it to be a composite of multiple molecules. And so the team has done a fantastic job innovating to deliver that in terms of our Infinity technology. You've seen some data from some of our customers. We've talked about the fact that we're bringing it to market later this year, and you'll continue to see more data and more information from us.

Our next question goes to Tycho Peterson with JPMorgan.

On guidance, 10% sequencing instrument growth, I'm just wondering if you could put a little bit more color around that. Obviously, you've got the NovaSeq DX launch. How material do you think that could be? And then, Francis, to your comments a minute ago, how do you avoid freezing the market ahead of Chemistry X being rolled out? And then a follow-up on GRAIL guidance as well, $70 million to $90 million is a big step-up from $10 million in the fourth quarter. So can you just talk a little bit about scale-up plans and how you plan to get there?

Yes. So maybe I can start, Tycho, this is Sam. Thanks for the question about the guidance on instruments, and I'll just provide a couple of brief comments. I mean, first of all, let me say instruments in 2021 represented incredible performance. We're entering the year now in 2022 with a record backlog of instruments. So it gives us a lot of confidence about the guide to 10%. As we think about some of the drivers behind this: continued very strong placements of NovaSeq, continued very strong placements on the mid-throughput side with NextSeq 2000, 1000 and we talked about in '21 the record performance across those 2 platforms.

Now there is a headwind, which is COVID surveillance. We placed quite a few instruments for COVID surveillance in 2021. And we don't expect, frankly, to place instruments for COVID surveillance in 2022. So that's a year-over-year headwind that's factored into the 10% growth in terms of the guide. For NovaSeq DX, that's a product that we're very excited to launch. It will be launched later this year. It does not represent a material impact in terms of growth for instruments in 2022. So Francis?

Yes. So let's talk about Chemistry X and what that means in terms of our customers and how do we avoid, as you said, freezing the market potentially. One of the exciting things we hear from our customers about being with Illumina is that you're part of this exciting road map, and that you're not only getting access to what we provide today but you know that we are going to continue to innovate and bring new products out. And so for our customers, it's been exciting to watch this journey of Chemistry X developed, and we've been, I think, good about sharing the data through this whole process. So they know what's coming. They can get a sense for what it can mean for them.

We don't have a new product announced, so there's nothing to freeze the market for. And our customers also know that they've done this with us several times that whenever we introduce a new product, we do have programs in place that involve trade-ins or, if you've already placed an order and it's in our backlog, you can switch that if you wanted the new instrument. And so over the years, we've developed a number of pretty robust programs around enabling a seamless upgrade for our customers.

Now also, the other thing we've learned is, especially in the clinical markets, that when a new instrument comes out, typically, some of our customers will buy one of the new instruments, for example, and use that to develop their new workflows, to get familiar with the new instruments and then plan an upgrade over a multiyear period. And so that could still play out that as we introduce a new instrument in the future, they may buy 1 to sort of get comfortable with it and then use that to plan and upgrade over a multiyear period.

And then in terms of GRAIL, the momentum we're seeing with GRAIL has been terrific to watch. They are seeing traction, as we said, with employers. And what's been interesting there is we expected traction with financial services companies, with tech companies, some other companies that traditionally are more forward-leaning in terms of using benefits as a way to attract talent. What we are really excited about is that we're seeing customers across industries. We've seen, as we said, large logistics players and transport players that have signed up to offer this benefit to their employees. And so that's been exciting to see.

We're also really pleased with the number of prescribing providers that have now got experience with the Galleri tests. So we said there are over 1,500 prescribing providers that ordered the test in 2021 last year going into this year. And so that's a great base of health care professionals that have some experience now with Galleri and should be more comfortable ordering it going forward. In terms of the guidance, most of the guide for GRAIL this year is Galleri. There is a component of it associated with MRD, but it is a smaller percentage. Now as we look at that number, that could be a potential area for upside, and we'll keep watching the traction they are making in that space.

Our next question goes to Dan Arias with Stifel.

Francis, just back on Chemistry X, is there anything you can add there on the per gigabase economics that might be at play? How much cheaper do you think genome pricing could be for the NovaSeq crowd? And then for the mid- and lower-throughput users, should those folks also see a cost of sequencing decrease if they're running a NextSeq or a MiSeq? And then if I could just sneak in a second one. On the Nashville Biosciences collaboration, what's the time line for the 250,000 samples that I think you're sequencing there? And is that all whole genome?

Yes. So let me start with Chemistry X and what it could mean. We know, just apples-to-apples, Chemistry 1 versus Chemistry X, that you will get significant cost reductions...

(technical difficulty)

Francis, you were cutting in and out a little bit there. I don't know if you want to try to fix that or if you want to try to restate your answer there or anything like that.

Yes. Just a summary I'll say on Chemistry X is it gives us a big step forward in terms of delivering price reductions, in terms of sequencing for our customers. But ultimately, the specific number will depend on the type of instrument we build it into as well as the other components of the technology ecosystem that we built into that instrument, the data paths, the optics and so on. And so stay tuned as we get more specific, we will share that with you.

Our next question comes from Vijay Kumar with Evercore.

Congrats on the print, and I had a question on the guidance here. Sam, your Q1 revenue guidance up sequentially, I guess we haven't seen that historically. And your guidance implies sequential ramp up throughout the year. I guess maybe just talk about the visibility you have. I know you made some comments around backlog being twice as high. So talk about the visibility into the guide. And Francis, I think on the $70 million to $90 million for GRAIL, is that the gross contribution? Is there some intercompany elimination in that number? Or is that a net number? Is that a proxy for Galleri volumes?

Yes. Thanks, Vijay. So let me actually take both questions. So I'll take the first one on the guide. The visibility on the guide is good. I think we have a balanced guide and we're very confident about achieving the guide that we have. With regards to Q1, you are correct. We are entering the year with very strong momentum in Q1. I mean the business is very strong. We're seeing very strong momentum on clinical, with oncology testing, in genetic disease testing, in NIPT. And our research markets are also robust. We have a very strong backlog, as we said, a record backlog, in fact, in terms of instruments. So that's what's driving the Q1 momentum.

As we look forward towards the year, this is a year that reflects a more, I would say, linearity that's more similar prior to the pandemic where we see a ramp or an increase in terms of sequential revenues throughout the year. There are a few things that we've considered in the guide that have been reflected in that 14% to 16%, Vijay, that we have factored in, that we believe also derisks the guide. So let me mention a couple of those. For instance, one is with regards to COVID surveillance.

As I mentioned in the prepared remarks, we're assuming $130 million to $150 million in terms of COVID surveillance revenues. That's a step-down from last year. It's, at the midpoint, approximately $80 million of step-down. We've also reflected a step-down in terms of population genomics driven by the termination of the UK Biobank, the finishing and the wrap-up of the UK Biobank. So that's a step-down in terms of population genomics revenues year-over-year. And NovaSeq is showing very, very strong pull-through. As we said, in 2021, we exceeded $1.3 million per instrument, and we're reflecting a pull-through guidance range of $1.2 million to $1.3 million to make sure that we factor in the significant instruments that are coming into the installed base that will take some time to ramp up to those levels of pull-through that we saw across the average in 2021. So in general, very confident about the guide, good visibility. But the backdrop to all of this is still a pandemic year here in year 3, and the uncertainty that goes with that.

With regards to GRAIL, the $70 million to $90 million, that's end GRAIL sales to their customers. So we do have intercompany elimination of revenues that impact our total consolidated Illumina revenues. But the $70 million to $90 million is the total end GRAIL sales to their customers. That's not impacted by intercompany. The sales from us to GRAIL show up on the core business, and then they're eliminated in the total consolidated view.

Our next question goes to Derik De Bruin with Bank of America.

So 2 related questions. One, on the new platform you're alluding to, are you going to take a HiSeq X approach and basically segment this and make it for like whole human genome or single cell applications? Or are you going to make it broadly accessible? And then a follow-on on that is I can certainly see elasticity of demand in the research market. I mean that clearly has been proven out. But what are your assumptions for the clinical market as you lower price? What are your sort of like volume assumptions? I mean don't you have to keep clinical pricing sort of at a premium for a while longer before you can really sort of see the volumes in there to make it up?

Great. Thanks, Derik. So let's take both. This new chemistry can be applied across the throughput spectrum. So all options at this point are on the table. There are options, like you said, where we could create an instrument that targets and catalyzes a segment of the market. So as you're alluding to, HiSeq X was extraordinarily successful at opening up the whole genome sequencing market that before HiSeq X enabled a $1,000 price point, a very small part of the market was whole genomes. And after HiSeq X, you've seen just an explosion in terms of the number of customers that could do whole genome sequencing and that did, in fact, do whole genome sequencing.

And so one of the options on the table that Chemistry X would allow us to do is, again, look for opportunities like that to catalyze certain segments of the market. I mean you could imagine lots of parts of the markets that could be catalyzed. So for example, hypothetically, you could look at the single cell market. And we hear from lots and lots of customers that they would love, love to be able to do much, much, much larger experiments with using single cells. And so something like Chemistry X could enable that part of the market. We also hear from our customers that they would love to run much, much larger experiments, targeting, understanding the genomic drivers of neurological conditions, like autism and Alzheimer's and Parkinson's. And so you can imagine that this could enable some of those kinds of experiments.

And so again, it depends on where we decide to use this chemistry, but the benefits it provides in terms of lower cost -- but also a faster turnaround time because one of the other things you could get with this chemistry is you could see scenarios where you can have certain tests being returned to customers within a single shift, and that would be fundamentally enabling to some clinical applications. So even the price was the same, just the ability to turn results around in a single 8-hour shift would open up potentially in some segments of the market.

From our customer in terms of the price perspective, there are some parts of the clinical market where, because we provide end-to-end solutions, we're already at the stage where the customers buy the product and it's priced in terms of a per report or a per sample fee. And those markets like NIPT, for example, or genetic disease diagnosis are already enabled at the price point they are. And so it's not necessary that the per sample price needs to change because reimbursement is already in place, allowing our lab customers to have a profitable business in those areas. But there are other clinical markets where the lower price point will be fundamentally enabling. And so that's sort of how we're thinking about the options in front of us with Chemistry X.

Our next question goes to Kyle Mikson of Canaccord.

Great. Just a 2-part question. So most of these new kind of short-read platforms are launching in the near term with like low- to mid-throughput capability, which is suitable for the clinical market like hospitals and clinical research. I'm just wondering if that's going to be an early focus for you as maybe that will lead into any clinical market share or growth in the near to medium term, the part of the market that's kind of under-penetrated right now.

And then the second part of my question I want to ask was, I mean, Francis, you mentioned earlier the Biden administration relaunched the Cancer Moonshot initiative. And it references multi-cancer early detection tests, particularly involving studies or trials to accelerate development and market adoption of the MSAID test. So I'd just like to understand your level of confidence that the initiative is going to move the needle for the MSAID industry overall. And importantly, could it improve the domestic or global perception of the merger, specifically with GRAIL, obviously, and potentially have any downstream impact on the ongoing trials or reviews.

(technical difficulty)

Kyle, pardon that interruption, but could you repeat your question now that the speakers are connected?

Sure. Can you hear me?

We can.

We can.

Perfect. Okay. So the 2-part question. The first of which was most of these kind of competing new short-read platforms that are launching in the near term or low to mid-throughput, which is suitable for the clinical market, that's going to be an early focus for these emerging companies. I'm just wondering if you think that's going to eat into any of your clinical market share or growth in the near to medium term given the area is still pretty under-penetrated. And then the second question I had was about GRAIL. The Cancer Moonshot initiative that the Biden administration have announced recently mentioned multi-cancer early detection tests. I just want to understand if you think the initiative is going to move the needle for the MSAID industry overall. And could it improve the domestic or the global perception of the merger specifically and potentially have any downstream impact on the ongoing trials or reviews?

All right. So let me take both. The first question is around entrance in the low- to mid-throughput market and how we expect that to play out. Let me jump there first. I'll say, obviously, we have terrific products in that part of the market. And we just, in the last couple of years, launched the NextSeq 1000, 2000 that are squarely targeted in that space. And we think they are especially well suited for the clinical markets because you have, from a clear perspective, the MiSeq Dx, the NextSeqDx, that are workhorses already in the clinical market. And then you have the terrific price performance that you get out of the NextSeq 1000, 2000. Those instruments, actually 1000, 2000, represent the most powerful mid-throughput products on the market, even including some of the entrants that are coming in. And I think that will continue to provide very compelling value to our customers going forward.

The other interesting dynamic, though, that we're seeing playing out in the market is more and more of the new customers coming in are coming in at higher ends of the portfolio than we've seen historically. And so what's playing out in the market is that the applications that are emerging for sequencing are more data intensive and sequencing intensive. They are high-intensity applications that are just demanding more sequencing and more performance power. And so what that means is, I think, and we saw this play out in the computer with the PC market, we saw this play out with iPhones, that the devices just need to be more and more powerful. In fact, as somebody who's telling you that NovaSeq is the new MiSeq. And I think that's sort of the ethos we're seeing in the market that there is this insatiable demand for more power. And what we consider today, if you're targeting what's the low- and mid-throughput today, you better show up with a lot of power because today, the future low and mid will look a lot more like today's high-throughput market.

In terms of GRAIL and the Cancer Moonshot, it's obviously great to have an increased national focus on cancer and bending the mortality curve for cancer. So that's terrific to see. It's especially exciting to see a recognition in that early detection of cancer. And specifically, early detection of multiple cancer simultaneously, a simple test, are an important thrust in terms of this fight against cancer. And so just the attention being put on this space, I think, is great to see. We're going to watch to see how that plays out in terms of additional funding or accelerated regulatory review or reimbursement. But we feel it's all very helpful in terms of accelerating that market. It's obviously especially helpful for GRAIL because GRAIL is the only product in the market today that can detect 50 cancers and identify tissue of origin. So that's obviously really exciting from a GRAIL perspective.

Our next question is from Sung Ji Nam of BTIG.

Just on the GRAIL multi-cancer MRD test that you're expected to launch next year, I was wondering if you might be able to comment on the performance characteristics against some of the single-cancer MRD tests that are available in the market today. And then could we expect potential interim data readouts throughout this year?

Yes. So the ultimate performance characteristics will be announced as the product gets launched, of course. But given the approach that GRAIL is taking, here are some of the things that we know already and some of the things that you can watch for. One is because it's leveraging the same underlying technology as the Galleri test, this is a test that will be able to detect the recurrence of multiple types of cancer, not just a single cancer. And so that's really helpful because sometimes the cancer that emerges may not be the exact same cancer as the patient had before. And so GRAIL's approach will be able to detect that.

Also, because you are not depending on a tissue biopsy first to create the test for a patient, you should also be able to get the test into the patient's hands much faster than you would with approach that required a tissue biopsy. So another key metric to watch, which is very, very important for some patients, is how quickly a patient can get that test and have it ready for the patient. So the GRAIL approach is just, conceptually, much faster from that perspective. And so that's another key metric to watch for.

And then in terms of the performance of the Galleri test, in terms of sensitivity and specificity for early detection, it's really strong. It has an extraordinarily low false-positive rate. And since the MRD test is going to be leveraging the same technology, that's something to watch for, too, that they're bringing a lot of expertise around delivering the screening test with high positive predictive value into the MRD market.

Our next question is from Puneet Souda of SVB Leerink.

I'll just ask 2 in one. First one is, I know you've been asked quite a bit about Chemistry X already, but I just want to clarify that the benefit of the Chemistry X is equal across all applications, from genome to exome to routine RNA seq to single cells. I just want to make sure. And then does it get to closer to $100 genome or $100 genome more meaningfully lower versus what a genome price is today? And lastly, if I could, I just want to clarify on the 10-kilo base reads that you're getting with Infinity, is that core technology still SBS? That's my understanding. And so at the end of the day, is this on the lower end of the long-read sequencing read lengths that are being produced by native long reads, so this is being viewed as a synthetic? So I just want to make sure we're thinking about that correctly.

Yes. So let me take the questions in order. First, Chemistry X. Is it specific to an application? Or does it work across all applications? So the answer is it works across all applications. This is a chemistry that is not tied to a specific application. So you will get the benefits of this chemistry across any application you run on a sequencer that uses this chemistry. It absolutely is a big step forward in terms of price reduction. And so depending on the form factor, depending on the instrument we put out, it will be able to deliver a lower cost in that part of the market. And so again, it's one component. As you know, chemistry is one part of it, but it's a part that's going to give us a big step forward whatever form factor we choose to release this chemistry and whatever instrument type.

In terms of Infinity, it is SBS. And one of the things we've heard loudly from customers is that they want a single platform that can scale up and down read lengths. What they don't want in their labs is multiple different technologies that have multiple different upfront workflows, that requires them to train text differently, that have multiple input DNA requirements. And so big, big requirement in this market is going to be you have a single chemistry, a single sort of platform that scales up and down, and that's what Infinity delivers. It's on SBS. And so it gives you all the things that you already know and are familiar with, with SBS. And so for our 8,000 customers and our 20,000 instruments in the field, that's really great news. In terms of the 10-kb, it's absolutely not at the lower end, to be honest, it's exactly where some of the other long-read players are in the market. Now there are some that can go bigger than that, but that's not where the majority of the market is.

Our next question is from Tejas Savant of Morgan Stanley.

A 2-parter for you, Francis. Just a point of clarification, first, in Chemistry X. I think I heard you mention earlier that you might bring it to some parts of the existing portfolio as well. So just a bit of finer point on that. Does this mean that it could be backwards compatible at least selectively? And then second one on the GRAIL guide here. Is it fair to assume sort of 85,000 tests at the midpoint using that sort of $950 list price? Or are you assuming a lower effective ASP in your guidance assumptions?

Let me take the first question. What I've said is we will be using Chemistry X for all new platforms going forward. But to your point, there's no technical reason why selectively we couldn't bring Chemistry X to parts of the current portfolio. We don't have plans that we've announced around that at all, but technically speaking, that it's absolutely backwards compatible for some parts of our portfolio. And then the GRAIL...

Let me take that one, Francis. So with regards to GRAIL, Tejas -- and thanks for the question, by the way. No, I would not assume that actually. The price is, as you said, at approximately $950 range. But I would not assume that, that price is uniform across the full guide or the total revenue guide because there could be different pricing assumptions depending on the collaborations, the partnerships that they have. So I would not make that assumption around the test volume.

Our next question is from Patrick Donnelly of Citi.

It might be one for you, Sam. Just in terms of the backlog, obviously encouraging to hear it's almost double what it was coming in last year. Can you just talk about how much of that is just a natural organic build as the numbers get bigger versus any supply chain issues? I'm sure that was a big topic a quarter ago. Do you feel like you're mostly past kind of the worst part? And what's the expectations there for the next couple of quarters? Have things normalized a bit for you?

Yes. I think the simple answer, Patrick, and thanks for the question, is really it's organic build. It's the strength of the business. It's the strength in terms of demand that we're seeing in clinical and the applications across clinical and research to some extent. And some of that backlog is instruments. Some of it is consumables. So it reflects the broad base of our business. In terms of supply chain, to address your question, I mean as we talked about last quarter, obviously, supply chain is more complicated these days with pandemic, with COVID. But we have taken a lot of steps and done a lot of initiatives to help preserve the continuity of the supply chain to make sure our customers have uninterrupted access to product.

So we have not seen really disruption in supply chain given some of these actions aside from very isolated cases that we see traditionally, but nothing unusual in terms of disruptions to supply chain. We've made sure that we've increased the amount of distribution center capacity that we have, we've increased safety stock on consumables. We've taken a lot of steps to ensure the integrity of the supply chain continues and that we can provide product to customers. So I just want to make sure that's clear.

Our next question is from Luke Sergott of Barclays.

So can you give us an update on the EC deadline suspension and ultimately what that means? And then as you guys kind of walk through the timelines in the appeals process, just give us an idea of how you could see that playing out if things don't go your way and then you appeal just from a timing perspective. And then lastly, I just wanted to get an idea of the margin characteristics here throughout the year and the guidance and really how we should be thinking about the pacing there.

Yes. So I'll take the first question, which is around timing of the various regulatory processes underway. So first, in terms of our Phase II review with the European Commission, we are currently in the phase where we are in discussions around potential remedies that could work for this deal. And so the pause we're in right now gives both of us, both sides, times to sort of work through that and discuss potential remedies together. And so what that means is it pushes the time line out a little bit. Initially, the time line was that we expected to get to a decision by the end of March. It's now looking like that decision is a Q2 decision.

There's separately another process, as you know, going on in Europe around a case in Luxembourg looking at the jurisdictional issues associated here. And that's a decision that's also likely in sort of the Q2-ish time frame. And so we'll be watching for that. The hearing happened in Q4, and we're waiting for a decision in that time frame. That's the time frame associated with the processes in Europe. If either of them go our way, we're done to the European part of the process and we can start integrating. If the review doesn't go our way, there's still an appeal process that we could look at after that decision happen.

Yes. And Luke, with regards to the margin evolution throughout the year, I mean we'll provide more updates on that as we go forward. We give you an update with regards to Q1 and what our guidance is for Q1 in terms of operating margins. We mentioned that Q1 is going to be a 300 basis point improvement from Q4 sequentially across consolidated Illumina, and we said that core Illumina in Q1 would be approximately 28%. Now going forward, we don't usually provide quarterly margin sort of comments, but we'll provide more updates as we go deeper into the year.

Our next question is from John Sourbeer of UBS.

So I think in your presentation last month, you said around 40% mid-throughput customers are currently in clinical, and I believe, around similar for the low throughput. Any thoughts on what the outlook is for 2022 on these? And what is the time line it takes to get to 50-50 there?

Yes. So I'll start. We have continue to see the percentage of our business targeting the clinical continue to grow. So if you look at our overall sequencing consumable revenue, you've seen that sort of steadily grow from the late 40s towards the mid-40s now, and that's continuing to grow. And if you look at how last year played out, we continue to see the clinical segments grow faster than the research segment. And so those lines are steadily going in one direction only. In fact, last year, the largest single segment that we target became oncology testing, the clinical segment. And that's likely to continue to be our largest segment for a long time. So that's overtaken genetic disease research which, for a very long time, as you know, was our largest segment. And so we don't have a specific time frame around when it crosses 50%, but it's definitely heading in that direction.

Yes, there is one other dynamic, John, that I would add

(technical difficulty)

of total Illumina revenues. I mean to Francis' comments, if you look over the last 3 years, the growth of clinical has exceeded the growth of research. Both markets are growing very robustly. That just reflects the fact that clinical markets with regards to oncology testing, genetic disease testing, NIPT have been growing really, really at an impressive clip.

There are no additional questions waiting at this time. So I'll hand the conference back over to Salli Schwartz for any closing remarks.

Thank you. As a reminder, a replay of this call will be available in the Investors section of our website. Thank you for joining us today. This concludes our call, and we look forward to our next update following the close of the first fiscal quarter of 2022.

This concludes the Illumina Q4 '21 earnings call. Thank you all for your participation. You may now disconnect your lines.