Illumina, Inc.

Hello and welcome to the Illumina Q3 2021 earnings call. Following the presentation today, we will have a Q&A session. If you would like to register a question, please press star followed by the number one on your telephone keypads. I would now like to hand the conference over to Brian Blanchett. So, Brian, please go ahead.

Good afternoon, everyone, and welcome to our earnings call for the third quarter of 2021. During the call today, we will review the financial results released after the close of market and offer commentary on our commercial activity, after which we will host a question and answer session. If you have not had the chance to review the earnings release, it can be found on the Investor Relations section of our website at Illumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer, and Sam Samad, Chief Financial Officer. Also joining us today is Bob Ragusa, Chief Executive Officer of Braille. Francis will provide an update on the state of Illumina's business. Bob will provide updates on Grail's business. And Sam will review both Core Illumina and Grail financial results. This call is being recorded, and the audio portion will be archived in the investor section of our website. It is our intent that all forward-looking statements regarding our financial results and the 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 Exchange Commission, including Illumina's most recent forms 10-Q and 10-K. With that, I now turn the call over to Frances. Thank you, Brian, and good afternoon, everyone.

Illumina's third quarter was another exceptionally strong quarter, with $1.108 billion in revenue, up 40% year over year, and, once again, significantly ahead of expectations. Our customer base continues to expand rapidly, and in the first three quarters of 2021, we added 50% more new customers than in all of 2020 or 2019. Because of this strength across our business, we're raising our full-year revenue growth outlook for the third quarter in a row to approximately 36%. This is approximately double the growth rate and $567 million higher than the midpoint of the range we guided to at the beginning of the year. I will talk through the third quarter results for Core Illumina, as defined as Illumina other than Grail, and then I'll turn the call over to Bob Ragusa, the CEO of our Grail subsidiary, to cover the Grail business. Core Illumina revenue was $1.106 billion. Sequencing instrument revenue was up 65% year over year, and we exited the quarter with a record instrument backlog, a positive leading indicator for future revenue. Sequencing activity in the quarter was also strong, with sequencing consumable revenue up 45% year-over-year, setting a new record. Our high-throughput platform order volume is accelerating. Oncology testing, population sequencing, and drug discovery initiatives drove record novacy consumable and instrument shipments. Oncology testing customers represented the highest proportion of NovaSeq shipments for the quarter, as large oncology testing labs added to their fleets to support expanded reimbursement for therapy selection testing. Drug discovery is emerging as a new application for high-throughput sequencing, with opportunities across common diseases ranging from obesity to aging. Our mid-throughput platforms also drove growth and expanded our install base. In the third quarter, over 50% of NextSeq 1000 and 2000 placements were new to Illumina customers or to customers upgrading from low-throughput instruments. These instruments continue to unlock new applications. Researchers at Tulane School of Medicine are using the NextSeq 2000 for single-cell experiments focused on infection and inflammation. The team is working to develop inhaled vaccines for pneumonia and use single-cell RNA-Seq on an X-Seq 2000 to study the immune cells elicited by this vaccine platform in a recent paper published in Science Immunology. Bench top platforms also saw significant growth year-over-year, with the highest number of MySeq shipments since Q4 2015. MiSeq, coupled with our COVID-Seq 96-sample assay, is enabling labs around the world to engage in local pathogen surveillance. This quarter, MiSeq placements in both Argentina and Brazil brought COVID surveillance to local communities in conjunction with broader national programs. Now, turning to clinical and research and applied segments, oncology testing, our largest market segment, had another record quarter. Sequencing is becoming the standard of care in therapy selection, which is driving robust demand for Illumina sequencers. And our oncology testing customers are rapidly scaling their fleets in response. Reimbursement for genetic testing for therapy selection continues to expand, with over 70% of insured lives in the US now covered for these tests. Additionally, there are over 60 targeted and immunotherapy treatments currently on the market. highlighting the power of comprehensive genomic profiling in matching patients to treatments. TruSight Oncology 500, our research use-only comprehensive genomic profiling assay, had another record quarter, with over 340 customers now using the assay in their labs. In September, we announced a CDX partnership with Merck to develop and commercialize tests leveraging TSO500 content and an HRD status based on Myriad's MyChoice in patients with ovarian cancer. Approximately 300,000 women around the world will be diagnosed each year with ovarian cancer, the fifth deadliest cancer for women. This partnership will help these patients access additional treatment options with the goal of improving care. In reproductive health, we saw another quarter of strong year-over-year growth. Almost 80% of pregnancies in the U.S. are now covered for non-invasive prenatal testing. And we're seeing additional progress as states begin to incorporate the ACOG guideline revision from last year into their prenatal screening programs. In California, the prenatal screening program is being revised to include non-invasive prenatal testing, and the state has now issued a request for proposal. NIPT is increasingly being incorporated into guidelines outside the U.S. as well. In September, the Italian Ministry of Health issued new guidelines supporting the use of NIPT in a contingent model. With the continued momentum in coverage and guidelines, our end-to-end VeriSeq V2 solution is gaining traction across global markets. Genetic disease testing also posted another strong quarter, as broad reimbursement and compelling clinical utility data drive a shift to whole genome sequencing. This quarter, the results of the groundbreaking NICU-Seq trial, co-authored by Illumina scientists, were published in JAMA Pediatrics. The randomized, time-delayed trial demonstrated that clinical whole genome sequencing drives a two-fold improvement in both diagnostic efficacy and change of clinical management for acutely ill newborns. We are working to ensure that families and NICU patients around the world can access these tests In the U.S., Michigan recently became the first state to offer rapid whole genome sequencing to acutely ill infants and children, regardless of insurance. And other states like California and Florida are making progress in this direction as well. Outside the U.S., last week we announced a pilot program in Israel to implement whole genome sequencing for critically ill infants suspected of having a genetic disorder and neonatal intensive care units. This program will accelerate time to diagnosis for these patients and support rapid clinical decision-making. Turning to our research and applied segments, we saw another strong quarter of sequential and year-over-year growth. The 30-plus population genomics initiatives that we support around the world drove growth in the quarter. The accuracy and scalability of our sequencing platforms combined with our end-to-end solutions like Illumina Connected Analytics make Illumina an ideal partner for large sequencing initiatives. The value of these population programs is expanding across clinical outcomes, research, and drug discovery. This traction is generating significant interest and investment for additional programs like Our Future Health. the UK's largest ever research program focused on developing new ways to detect, treat, and prevent disease. Just yesterday, we announced that Illumina-connected analytic solutions are being used by HostSeq, part of the Canadian COVID-19 Genomics Network. Our sequencing and bioinformatics solutions will be used to identify biomarkers that can help predict potential risk of serious disease. and support the development of novel therapeutics to combat COVID-19. We anticipate these types of population programs will become increasingly critical to innovation, as their findings translate into greater use of sequencing in clinical workflows and actionable data for drug discovery. We're already seeing this with the initial data from the UK Biobank, as the program concludes. Regeneron is utilizing the UK Biobank data in multiple ways, including to find more than 500 genes with variant trait associations linked to higher risk of diseases like hypertension, asthma, and liver disease, and as part of their data set to create new obesity medicines in partnership with AstraZeneca. And companies like Relay Therapeutics are utilizing genomic data, along with AI and machine learning, to advance drug discovery. COVID surveillance drove $55 million in sequencing shipments in the quarter, of which $15 million were instrument purchases, as concerns about variants continue to heighten the focus on surveillance efforts. we see the infrastructure for COVID surveillance as the foundation for broader pathogen surveillance to increase around the world. For example, SIRI, a new genomic facility in South Africa, was launched this quarter with capabilities to bolster the pandemic and epidemic response across Africa. With resources like this in place, sequencing data from 51 of the 54 countries in Africa is now available in GISAID. and a total of 50,000 SARS-CoV-2 geomes have been sequenced, two months ahead of Africa CDC's schedule. Turning to Grail, in August we closed our acquisition, which we believe will help accelerate patient access and affordability for multi-cancer early detection screening. I am delighted to introduce Bob Ragusa on his first call as Grail's CEO. Bob most recently served as Illumina's chief operations officer, and he has more than 30 years of experience in genomics. He played a critical role in providing the sequencing systems for the Human Genome Project and was responsible for significantly scaling Illumina's business in more than 140 countries and enabled the first NovaSeq shipments. With his decades of deep expertise, Bob is uniquely positioned to lead GRAIL during a time of extraordinary growth and discovery. I will now turn the call over to Bob to discuss GRAIL's business updates.

Thank you, Francis. I'm honored to lead the talented team at GRAIL as we advance the mission to detect cancer early when it can be cured. I am pleased to share a few thoughts on our recent progress. First, I want to highlight Gallery commercial progress. We see significant pre-reimbursement opportunities for Gallery and encouraged with the momentum across our three primary channels. In the employer channel, we are gaining momentum and expect to announce notable new partnerships in the technology, industrial, professional services, and transportation sectors. We are also successfully engaging with key high cancer risk area public sector employers, such as firefighters. For health systems, we are focused on establishing strategic agreements with influential systems in the medical community to increase awareness and experience with gallery. Health systems are also strategic partners to generate real-world evidence in key patient communities and regions. To date, we have signed agreements with several health partners who are planning to start providing access to gallery in the fourth quarter. We're also in contract discussions with several additional influential health systems that we expect to We'll begin offering Gallery to patients early next year. In addition, we are excited to see interest from progressive and innovative payers, including Medicare Advantage, where we expect to communicate our first partnership soon. Medical practices are an important driver of the Gallery launch. We have agreements with several of the largest primary care private practice networks and expect to continue to expand in this area. We are focused on onboarding physicians in these networks and see positive prescriber trends. We also recently partnered with Genome Medical, an independent healthcare provider, to serve individuals who prefer a telemedicine option. We launched this service several weeks ago on gallery.com and believe this will be an important future pre-reimbursement growth driver. In addition, we partnered with PWN Health, a national telehealth network, to further extend our service capability for some employer programs. Additionally, in September, the State of New York granted approval for the gallery test. The standard set by New York State represents one of the most rigorous levels of validation required for laboratory-developed tests. Finally, there is tremendous excitement around the recent start of the NHS Gallery Study, a 140,000 participant, real-world, randomized, controlled study that has generated widespread national and international media coverage. This is part of England's national priority to speed up earlier detection of cancer to improve survival. Enrollment has been robust and is on track with our expectations. Based on data generated from this initial study, access to gallery could expand to around 1 million people in 2024 and 2025 and to a larger population after that time. Lastly, I would like to note that the reported GRAIL revenue represents both revenue recognized from the sale of our gallery test and generated from our MRD collaboration agreements with biopharmaceutical companies. We are encouraged by the initial test results generated with our partners and plan to expand a number of pilot studies to support development of MRD and PDX product opportunities. We also expect MRD and PDX collaboration income will continue as an important component of Grail's revenue mix and is an attractive future growth driver of our business. I look forward to sharing with you more about Grail's progress in the coming quarters. Now I'll turn it over to Sam.

Thanks, Bob. As a reminder, our third quarter financial results include the consolidated financial results for GRAIL for the period beginning after the acquisition closed on August 18, 2021. I'll start by reviewing our consolidated financial results, followed by segment results for Core, Illumina and GRAIL, then conclude with our outlook. I will be highlighting non-GAAP results, which include stock-based compensation. I encourage you to review the gap reconciliation of these non-gap measures, which can be found in today's release and the supplementary data available on our website. Third quarter revenue once again significantly exceeded our expectations, growing 40% year-over-year to $1.108 billion, driven by core Illumina revenue growth of 39% and $2 million of revenue from GRAIL. For the third quarter, GAAP net income was $317 million, or $2.08 per diluted share, which included a $900 million gain from our previously held investment in GRAIL as a part of the acquisition, and $654 million in day one compensation expense related to the GRAIL acquisition. Non-GAAP net income for the third quarter was $221 million, or $1.45 per diluted share, which included $0.19 of dilution from GRAIL operating losses and $0.06 of incremental dilution from the $9.8 million shares issued to fund the GRAIL acquisition. Our weighted average diluted share count for the quarter was approximately $153 million. Moving to the rest of the consolidated P&L, non-GAAP operating expenses of $528 million increased $57 million sequentially primarily due to the inclusion of Grail non-GAAP operating expenses of $50 million for the quarter and a $7 million increase in Core Illumina non-GAAP operating expenses. Non-GAAP operating expenses increased $163 million year over year, driven by $50 million of Grail non-GAAP operating expenses and $113 million increase in Core Illumina non-GAAP operating expenses. Non-GAAP other expense of $6 million increased $4 million sequentially and was $13 million lower than other income in Q3 of last year as expected. The year-over-year decline was primarily due to lower interest income on short-term investments as we repositioned our investment portfolio and subsequently liquidated our holdings to fund the GRAIL acquisition, as well as interest expense on the term notes issued in Q1 2021. The non-GAAP tax rate of 13.2% decreased from last quarter and year-over-year due to the tax impact of including GRAIL and Illumina's consolidated results of operations. The decrease in the non-GAAP tax rate year-over-year was partially offset by discrete tax benefits recorded in the third quarter of 2020 related to prior year return adjustments and tax reserve releases. Moving to segment results, I will start by highlighting the financial results of Core Illumina. Core Illumina revenue grew 39% year-over-year to $1.106 billion, driven by record shipments for both clinical and research. Core Illumina sequencing revenue of $1.013 billion grew 43% year-over-year and represented 92% of Core Illumina revenue. Core Illumina sequencing consumables revenue grew 45% year-over-year to $723 million, led by record NovaSeq consumables shipments that grew over 50% year-over-year. Sequencing instruments revenue for Core Illumina grew 65% year-over-year to $180 million, driven by record NovaSeq shipments that again more than doubled year-over-year due to accelerating demand in oncology testing. Next Seek 1000 and 2000 orders reached a new high in the quarter and there was solid growth across all mid and low throughput systems year over year. We ended the quarter with record sequencing instrument backlog that is almost double the backlog entering the year. Revenue from COVID-19 surveillance again exceeded our expectations due to the sustained focus on variant tracking and surveillance infrastructure scaling in the quarter. contributing approximately $40 million in sequencing consumables revenue and $15 million in incremental instrument revenue. Core Illumina sequencing service and other revenue grew 11% year-over-year to $110 million, driven by higher instrument service contract revenue on a growing installed base, as well as gel sample growth. Moving to regional results for Core Illumina. Revenue for the Americas region was $581 million, growing 33% compared to the prior year period. Revenue growth in the region was driven by record oncology testing shipments and ongoing population genomics initiatives, such as All of Us. The regional performance was also driven by COVID surveillance strength due to expanded public health network adoption of NGS in Latin America. EMEA delivered revenue of $313 million, representing 47% growth year over year. EMEA's performance was driven by significant growth across all clinical markets and strength in emerging markets. Population genomics initiatives, partially driven by UK Biobank, which concluded in Q3, and COVID surveillance testing also contributed to the strong third quarter performance in the region. Greater China revenue was $122 million, representing growth of 47% year-over-year, due to continued clinical strength in the region, led by NexSeq DX demand in hospitals and oncology testing growth. Almost half of the NexSeq DX shipments were to new to Illumina Hospital customers, and the expanding footprint in hospitals is helping drive growth in infectious disease testing, which more than doubled year-over-year. Finally, APJ revenue of $90 million grew 45% year-over-year, driven by sequencing instrument growth from clinical demand for Nexi 2000, as well as consumables revenue growth across oncology testing and research. Moving to the rest of the core Illumina P&L. Core Illumina non-GAAP gross margin of 71.3% declined sequentially by 50 basis points, due primarily to one-time revenue from the NIPT patent litigation settlement recorded in the prior quarter. On a year-over-year basis, non-GAAP gross margin increased 390 basis points due to increased fixed cost leverage on higher volumes, partially offset by higher freight costs as a result of the pandemic. Core Illumina non-GAAP operating expenses of $478 million were up $7 million sequentially. but overall were lower than expected due to the timing of hiring and project spend shifting into Q4. As expected, non-GAAP operating expenses were up $113 million year-over-year due to increased performance-based compensation expenses and headcount growth, as well as additional investments to support the significant growth of our business. Core Illumina non-GAAP operating margin was 28% compared to 30% in the second quarter of 2021. Operating margins declined sequentially as expected, mostly due to $20 million of one-time patent litigation settlement revenue recognized in the prior quarter. Transitioning to the financial results for GRAIL. GRAIL revenue of $2 million for the quarter consisted primarily of gallery test fees. the multi-cancer early detection test that commercially launched in June, as well as moderate MRD partnership revenue. GRAIL non-GAAP operating expenses totaled $50 million to the quarter, which consisted primarily of expenses related to headcount and clinical trials. As a reminder, GRAIL's third quarter financial results are for the period beginning after the acquisition closed on August 18th. Moving to cash flow and balance sheet items for Consolidated Illumina. Cash flow used in operations was $272 million, which was a net outflow for the quarter due to expenses related to the GRAIL acquisition. DSO of 50 days compared to 44 days last quarter driven by revenue linearity. Third quarter 2021 capital expenditures were $52 million, and free cash flow was a negative $324 million. we did not repurchase any common stock in the third quarter. We ended the quarter with approximately $1.3 billion in cash, cash equivalents, and short-term investments. During the third quarter, we used $2.9 billion to fund the GRAIL acquisition. Before I discuss guidance, I wanted to acknowledge that I'm especially proud of our team's strong execution to fulfill surging demand and deliver another record quarter in a challenging global environment. While there were some small pockets of supply constraints for certain products in specific geographies this quarter, there was no material impact thanks to our team's incredible efforts. We will continue to source, produce, and operate with agility to enable further growth and support our customers. Moving now to 2021 guidance. We now expect full-year 2021 consolidated and core Illumina revenue to grow approximately 36%. This represents consolidated revenue of approximately $4.41 billion for 2021, or revenue growth of approximately $1.17 billion compared to 2020, and an increase of approximately $100 million compared to the midpoint of our prior guidance. For fiscal 2021, We now expect Core Illumina sequencing revenue to grow approximately 39% year over year, driven by continued momentum in our base business. We now expect Core Illumina non-GAAP operating margin to be between 27.5 to 28%, which reflects our higher revenue expectations. We expect Core Illumina operating expenses for Q4 2021 to increase by approximately $50 million compared to Q3 2021, due to the timing of expenses shifting from Q3 into Q4, increased investments to support the robust growth of our business, as well as expected payments in Q4 2021 related to certain partnerships. Our focus continues to be on improving the core Illumina operating margin leverage over time. We now expect our non-GAAP tax rate to be approximately 17.5%. We now expect consolidated non-GAAP earnings per diluted share in the range of $5.50 to $5.60, which includes dilution from GRAIL operating loss of approximately $1 and incremental dilution of 15 cents from the 9.8 million shares issued to fund the GRAIL acquisition. We now expect GAAP earnings per diluted share in the range of $4.41 to $4.51. we now expect diluted shares outstanding in fiscal 2021 to be approximately 151 million. For the fourth quarter of 2021, we expect non-GAAP earnings per diluted share in the range of 35 cents to 45 cents and GAAP earnings per diluted share in the range of 10 cents to 20 cents. We expect diluted shares outstanding for the fourth quarter of 2021 of approximately 158 million. Now I'll hand the call back over to Francis for his final remarks.

Thank you, Sam. Our third quarter performance reflects the strength of our business, the talent and dedication of our people, and the enduring value of our mission. Before I close, I would like to highlight how we're furthering this mission through our ESG work. Human health and the health of the environment are intertwined, as are our company mission and our commitment to operating responsibly and sustainably. In the third quarter, we announced aggressive environmental goals, including our net zero commitment to advance the climate component of our ESG strategy. Sam and I will discuss this strategy in greater detail at our inaugural ESG investor event on November 16th, and we hope you will join us. To close, we saw remarkable performance and broad-based strength across our business in the third quarter, and we are both inspired and excited to see this momentum continuing into Q4. We again raised our annual revenue guidance, and with our record instrument backlog, we're on pace for a strong finish to an exceptional 2021. We will build upon this strength as we seize opportunities to expand existing markets, including oncology testing and infectious disease, along with new applications. Sequencing data will enable this expansion as we usher in the era of genomic medicine. And Illumina will be at the forefront of these innovations, supporting our customers as we collectively advance human health. Now, I'll invite the operator to open for Q&A.

Thank you. The Q&A session is now open. If you wish to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit your questions to one at a time. We have the first question on the phone lines from Dan Brennan of Cowen. So Dan, please go ahead.

Great, great. I thought for the first question, I would want to Big in on the outlook for the fourth quarter. You know, after a really strong start to the year, you know, you're raising guidance. But, you know, fourth quarter looks to be conservative to us. And I'm just wondering a couple of things here. Is there anything implied further for COVID testing? I know you had 25 to 30 million per quarter originally in your guidance. So have you upped that after the strong COVID here in Q3? And, you know, given the easy comp and given the backlog and the momentum, I'm just wondering why the fourth quarter outlook might not be stronger. And then I have a follow-up. Thank you.

Yeah, thank you, Dan. This is Sam, and hope you're doing well. Welcome back, and good to have you on the call. So for Q4, first of all, let me talk about the full year. We are, as we talked about on the prepared remarks, Dan, we are raising our revenue guide to approximately 36%. For Q4, I think there's a couple of areas that you need to keep in mind. One is the conclusion of the UK Biobank Initiative. This has been an incredibly productive, incredibly successful, I would say very important initiative from a population genomic standpoint, and we talked a little bit about the outcomes from that and the next steps. But that will likely present a $20 million quarter-to-quarter headwind or reduction in terms of revenues in Q4 versus Q3. So that's one area. And then the second area, and I think you touched on that in your question with regards to COVID surveillance. So COVID surveillance has been strong for the year. We've seen, obviously, with the pandemic the way it is, but there's continued testing and sequencing of positive samples across the globe. For Q3, we have $55 million of COVID surveillance revenue in the quarter. That represented $15 million of instruments and $40 million of consumables. For Q4, our expectation is that we will have $35 million of COVID surveillance revenue, which represents modest amount of instrument revenues, about $5 million, and then approximately $30 million of COVID consumables. That represents, again, another $20 million reduction from Q3 into Q4. So when we think about that sequential momentum, you know, the poor business is really strong. And when I say the poor business, I mean our clinical business, research business. You heard comments from Bob around Grail. But there is that reduction associated with those two items, which is COVID surveillance, as well as the UK Biobank concluding.

Great. And then in terms of clinical, you know, Francis in therapy selection, you gave a lot of calls there, talked about customers rapidly adding platforms. Could you give us a sense of, I don't know if you have this information, but kind of the install base that's supporting this customer base, you know, what that's been growing at and kind of, you know, what's the backlog look like and outlook for further growth in that area? Thank you.

Yeah, thanks, Dan and Ella. My welcome to count, and it's great to see you covering us again. So I did talk a lot about the strength in the oncology segment, specifically oncology therapy selection testing, because that really has been one of the breakout stories, frankly, for the whole year. And what's really driving that story is a few things. One, we saw a significant expansion in reimbursement. for genomic testing for therapy selection play out in the U.S. And so now we have a significant base in the U.S. that has coverage for genomic testing. And at the same time, we've seen a move towards larger panels as comprehensive genomic profiling really gets traction in the market. And so those two have created a powerful force in oncology therapy selection testing, and we're seeing our customers, you know, expanding their fleets. Now, In terms of how that's playing out, you're seeing it play out across all segments. You're seeing some of our larger customers significantly expanding their fleets and expanding their NovaSeq fleet specifically because of the demand that they're seeing, as well as the anticipated demand going forward. But you're also seeing new customers and some of our smaller customers get into oncology therapy selection. One of the interesting metrics to look at, and and it takes into account more than oncology, but I'd say oncology is one of the biggest drivers of it, is if you look at the strength in the NovaSeq instruments, you'd see we're placing a lot of NovaSeq instruments and we're having a very strong backlog of NovaSeq instruments. And at the same time, you're seeing really strong go-through in NovaSeqs. And so that's sort of the pot of gold at the end of the double rainbow, right? Because you're seeing, you're putting a lot of instruments out there and yet, pull-through remains high at the high end of the range we've talked about. And so to your question about what's the outlook going forward, I'd say that's a really good positive indicator for what people are experiencing today and what they're expecting going forward.

Great. Thanks, Francis.

Thank you, Dan. We now have the next question from Vijay Kumar from Evercore. So, Vijay, please go ahead when you're ready.

Hey, guys. Congrats on a good print here, and thanks for taking my question. I had one question on the implied Q4 guidance in fiscal 22. The updated EPS guidance of 550 to 560, that implies about, I think, $0.30 to $0.40 in Q4. Is that Q4 guidance? Do you have some one-off costs, or is that something abnormal happening? Because that's an annualized run rate of $1.60. I don't think that sounds right. I just want to make sure I have the Q4 assumptions right. And for fiscal 2022, should comps matter? Because most of your peers are assuming normalized growth and giving you a common trend backlog. I understand you have surveillance being a big component this year, but the 36% should comps matter, and how should we think about it?

Yeah, so let me start by talking about Q4, Vijay. And we did talk about, you know, EPS guide at $0.35 to $0.45, non-GAAP EPS for Q4, you know, including the effects of GRAIL. So as I talked about on the call, there are in Q4, you know, there's $0.80, roughly of dilution, a dollar for the year, but in Q4, about 80 cents related to GRAIL dilution. And then there's about nine cents of dilution related to the weighted average share count as a result of the shares that we issued to finance the GRAIL acquisition. Those are specific to Grail. That obviously impacts the $0.35 to $0.45 non-GAAP EPS for Q4. In terms of the core Illumina business, to answer Dan's question, I talked a little bit about a couple of dynamics around revenues. In terms of OPEX, yeah, there are some costs that I also mentioned in our prepared remarks. First of all, we have timing of expenses that shifted from Q3 to Q4. That's why Q3 was lower than our expectations in terms of operating expenses. Q4 now has increased in terms of our expectations for spend there and then i talked about also partnership uh opex uh that is expected in q4 so we do have some expenses associated with certain partnerships that's somewhat significant in q4 that's uh that's discreet to q4 you know in terms of 2022 guidance we're not going to talk about guidance on this call except to say the fundamentals of the business are incredibly strong we have talked before about the grail dilution of 3.25 to 3.75 for 2022, that remains the case. That has not changed. But, you know, as you heard, the backlog is very strong in terms of instruments and the core fundamentals in terms of clinical and research are exceptionally strong.

Sorry, one clarification, Sam. The 325 to 375 dilution from Grail, that is not incremental, right? You guys have taken $1.15 of dilution in fiscal 21. So the 3.25, 3.75, that is in total of the 1.15.

That's total dilution for GRAIL in 2022. That's not incremental. That's the total dilution that we expect, $3.25 to $3.75 impact on non-GAAP EPS in 2022.

Thanks. Thanks, guys. You're welcome.

The next question comes from Taichai Peterson of JP Morgan. So, Taichai, please go ahead.

Hey, thanks. Sam, I want to hone in on your supply chain comment a little bit. You know, it sounds like limited disruption up until now. You know, we have heard about customers not being able to get flow cells and limited notice of shipment, but you did accept a quarter with record backlog. So, can you maybe just touch on, you know, the supply chain dynamics now, given, you know, the well-telegraphed, you know, well-publicized shortages of semis, but also, you know, cameras and high-end opticals?

Yeah. Hey, Tycho, this is Francis. So I'll start by saying, look, it's a good question because anytime you have just such a big beat and you have, you know, demand coming in so far ahead of expectations, I think now we're looking at, you know, the guide we've put out now is, you know, over 500 million over the midpoint of the guide we put out at the beginning of the year. So anytime you have such a big beat playing out against the backdrop of a pandemic, the first thing you look at is, you know, the supply chain you're able to serve. And as we said on the call, I'm incredibly proud of the work the team has done in terms of demand capacity planning to make sure that we're able to stay ahead of this, you know, big demand we're seeing. And as we pointed out, we started to see this demand build at the tail end of last year. And so the team did a lot of work on a number of fronts. First, they did work around making sure that our inbound supplies would be able to cope with the demand that was coming. And that meant things like building a safety stock internally of supplies coming in, ordering items that would have long lead times, sometimes up to a year plus in advance for things like resins where we knew there might be shortages. But then also, we started to invest in increasing our own production capacity, and that was true across the board. So whether it's NOC cartridges and flow cells or arrays, across the board, we started, certainly by the first half of this year, we were significantly increasing capacity to build the supplies. And then in addition to that, we started to invest starting last year in increasing our ability to move production. So specifically, for example, We expanded our warehousing capacity in Eindhoven and opened up a new center in Eindhoven, and that's our regional distribution for EMEA, as you might know, and we doubled the capacity we had in Eindhoven. Similarly, we expanded capacity in Japan this year from a warehousing perspective. We put a new warehouse in Brazil this year, and we also continue to invest in strengthening the transportation links between these hubs. And then we started to build safety stock on the outbound side to make sure that we had enough inventory on site to cope with what we knew was going to be strong demand ended up being much stronger than even we had expected. And so for the vast majority of our core consumables now, you know, we have safety stock on hand at six to eight weeks of supply. And so our team did a really terrific job sort of calling it early and then jumping on it end to end to make sure that we had the capacity to supply the demand coming in.

Yeah, so the only thing I would add to that, thank you, Francis, is that the backlog is really strong driven by the demand. All of those things that Francis mentioned are actions that we've taken to ensure there's continuity in the supply chain and we're fulfilling customer orders on time. There have been, I would say, a few isolated customer instances where there have been extensions of lead time, which is normal. That's very much a something that we see every quarter. But in general, the backlog is really driven by demand. It's not driven by any supply issues that are causing that.

Thank you. We now have a question on the line from TJ Savant of Morgan Stanley. So TJ, please go ahead.

Hey, guys. Good evening. I have a quick question on Grail. Francis, do you have any updates from the regulators now that they've had some time to digest your decision to close? Have you heard anything from them on the structure of the whole separate agreement and the possibility of the fine? And then secondly, can you just lay out your plans to build out the commercial infrastructure here now that Gallery is live and you've started to see early traction from the Mayo Clinic and some of the other partners you highlighted in the prepared remarks?

Yeah, so maybe I will talk about the regulatory process, Tejas, and then I'll turn it over to Bob to talk about, you know, thoughts about commercial expansion. So from a regulatory process perspective, there have been no surprises. It's frankly playing out just as we'd expected. We are engaged with the two processes in the European Commission, and that's playing out. We look to get a decision on the phase two review that's happening in Europe. at the tail end of Q1 likely, may slip a little. And we are waiting for the trial date for the jurisdiction trial that's happening in Brussels. So playing out as expected. And then in the U.S., we're continuing to wrap up the administered trial that just played out. and we expect a decision likely in Q1. So we tail end of the year with more likely in Q1. So it's playing out as we expected in terms of the hold separate. You know, the order came out, and it was consistent with how we thought it would be and consistent with, generally consistent with the hold separate that we put into place ourselves voluntarily in anticipation of how this would play out. So in general, no real surprises. The process is playing out as we planned. Now I'll turn it over to you, Bob.

Hi, thanks, Francis, and thanks for the question on the commercial build-out. You know, as we're looking at, you know, the demand picture, we see significant, you know, pre-reimbursement opportunities for Gallery, and it's really across, you know, three main channels, employer, health systems, and medical practices. And one of the key elements of working with the team now is to make sure that we can, in fact, ramp up the commercial scale of the organization to really meet the demand that's out there. In addition, just the commercial side, we're going to have to ramp up really the entire operation so that we have the ability to deliver at scale a great customer experience. And so that'll – you know, cause us to build across a number of functions across the company. Really excited to be able to take on that challenge because, you know, we were in the beautiful position of having, you know, a product that is so strong and now just really building out, you know, having the opportunity to build out all the commercial elements and all the delivery elements so that we can really deploy Gallery in a big way.

Yeah, maybe I'll just add one other thing from a personal perspective. We rolled out the Grail test to Illumina employees, as I know some of you listening may also have. And, again, as a CEO, there are a few times in your career you get to roll out something that's universally beloved and will still save you money. And, you know, we started to see sort of the first people come and reach out to us and say that, you know, they've been able to – they feel fortunate they've been able to find an early-stage cancer because of the gallery tests. And the cancers they're talking about are ones that don't have other screens. And so – This is a very personal realization of the power of this test.

Thank you. We now have a question from Patrick Donnelly of Citi. So Patrick, please go ahead when you're ready.

Hey, guys. Thanks for taking the questions. Francis, maybe one on China. Can you just talk about what you're seeing there? There's obviously a lot of noise in different parts of the market, and you guys put up pretty good results. Can you talk about the trends there you're seeing and expectations going forward?

Yeah. So we have continued to see a really strong performance out of China. We overall have 47% year-over-year growth. And, you know, the growth in China continues to be driven by the clinical markets. And so our strategy, starting last year, really focusing on the emerging hospital market is really paying dividends. It's a market that's really embracing not just an IPT, which they embraced early, but increasingly also starting to more broadly roll out oncology testing strategies. And so we're seeing progress there. A lot of it is driven by the terrific partner ecosystem that we've built up over the years in China. That's really paying off. In addition, we're actually seeing a tailwind associated with some regulations that have emerged that allow the use of LDTs. in Shanghai. And so that's fairly recent, but it's already started to pay dividends as you see more labs being stood up to generate their own LDP testing capability. And so that's helped us in driving some of the tailwind there. But we're definitely excited and optimistic about what's happening in China for us right now.

Okay. And then maybe one on the population sequencing. You obviously called out UK Biobank, concluded this quarter. Can you just update us on how you're feeling about those rolling out? And again, as we kind of see some data and see the use of UK Biobank, the potential for that's become a bigger piece for you guys.

Yeah, absolutely. So one of the things that has been really great to see is the broadening of the base of population sequencing customers. So we've talked about the fact that we've been cultivating over 50 of these opportunities, and we're now at the stage where over 30 of these opportunities are already generating revenue. So that's really good to see from a diversification perspective. What's also really great about it is a lot of these population sequencing initiatives are driven from a national health perspective. So, you know, they aren't research projects. What you're seeing is countries embrace genomic testing as part of a standard of care in a health system. And that's terrific, first of all, because of the very human impact it allows you to have because you're in the pathway of delivering, you know, valuable information to patients. But it also is a place that's very durable, right? So it means once you're built into the health care system, then you just get ramped up to population scales, and it goes year after year. And so that's another really exciting thing to see. The other thing that's playing out is starting to see the emergence of cohorts, you know, a lot of them involving pharma partners that are looking to generate data from population level data from some of the big data repositories out there around the world, like biobanks. And so that's sort of an emerging and sort of building part of the population sequencing ecosystem right now, too.

We now have Derek de Bruin of Bank of America on the line. So, Derek, please go ahead. You may proceed with your question.

Hey, this is Mike for Derek. Thanks for taking the question. I've got a couple of quick ones, and I'm just going to focus on the sequencing instruments side of the business. You called out really broad strengths. um, piloting, I think Nova seek next week, uh, 1000 to 2000, um, and then my seek, that's pretty much the majority of portfolio, but the total sequencing instrument number, uh, revenue still declined sequentially. So I'm just wondering, um, if you could talk to pricing dynamics or an ASP that there's any, uh, unusual going in there, um, maybe, and then I got to follow up on that.

Yeah. Thank you. Um, uh, thank you, Mike. And, and, um, Appreciate the question. Listen, in general, there is really no fundamental change at all in terms of the, you know, in terms of instrument demand from Q3 or Q2 into Q3. You know, in general, we do have sometimes some ebb and flow between the quarters in terms of instrument revenues. NovaSeq had record revenues for the quarter, record placements. in terms of doubling the placements that we had last year. As we said, we exited the quarter with record backlog in terms of instruments. So I would say there's probably some very small movements here and there, but nothing really that's anything significant in terms of why we were slightly down in terms of Q3 versus Q2. You know, in terms of sequencing instruments as well for COVID surveillance, I would say that was a minor factor as well from Q2 into Q3. There was a few less. sequencing instruments that were placed in Q3 compared to Q2. So that has, you know, a little bit of an impact there as well. But in general, demand is exceptionally strong, as we talked about, you know, with doubling the next week, 2,000, 1,000, and 550 placements versus, you know, prior years, not just last year, but prior, you know, historically, what we used to place in the mid-Prooper category. And then the NovaSeq demand is exceptionally strong.

Yeah, I mean, sort of reiterating what Sam just said around, look, we are walking into Q4 with a record instrument backlog, right? So a really strong place to be. We had record instrument shipments in Q3 for NoSeq, and the pull-through on NoSeqs even with all the instruments we just placed. And you expect a lot of them are still in their ramp-up mode, where they should be at the low end of pull-through. But even with that, the total average pull-through on NovaSeqs is at the high end of the range we've talked about. So it's in peg there. And so there's just a lot of activity happening on our NovaSeqs out in the field. And that's causing customers to place the orders that are driving the record backlog that we have walking into Q4. And so we really feel that it's a really fantastically strong position to be.

Thank you. We now have Pruneet Sudha of SCB Lerink on the line. So, Pruneet, please go ahead when you're ready.

Thanks, Francis, and thanks for taking the question. So first one on Grail, and actually maybe this is for Francis and some for Bob, just in terms of the trials that you have to conduct at this point in time. You mentioned the UK NHS trial ongoing. Obviously, you've committed to Grail and taken on the dilution. But in terms of the overall trials that you need that are prospective registrational trials that FDA needs to look at that are prevalence-reflecting trials in order to get a screening assay approved on the market. If you could walk us through that, what are you doing to progress towards that? What's the timing of it? What is that trial? Is UK NHS that trial, or is it any other trial or bank samples that you have already collected that you can potentially run and submit that data. So just trying to understand in terms of the sort of, you know, more than 50,000 or 100,000 patient trial letters needed in order to get an FDA approval and then eventually reimbursement and guideline inclusion.

Yeah, so maybe I'll start and then turn it over to Bob. I would say what we've said before continues to be true today, which is in the U.S., This test has been rolled out as an LDT and it doesn't need anything more. It's on the market today. It's a self-pay test. You can order it today. Some employers are already covering it. There are some health systems that are looking to roll it out. And if it's a concierge system, it could be, for example, as far as a subscription model or ARB models. And so nothing in the U.S. is needed for the test to continue to be on the market. It's been on the market since June. And nothing in terms of trials are needed for the existing revenue sources that Bob talked about to be real. So everything in terms of studies and data is all out there. In fact, the studies that were published earlier this year just reinforced already the huge amount of data that's been put out onto the market so far. So nothing more is needed there. And what we said about the NHS is The NHS is sort of a self-contained trial in the sense that it has designed the milestones and the progress that would get it comfortable rolling it out at a population scale. And they were the ones who rolled out the path that said we could start at 140,000, then scale up to a million in the next couple of years, and then go population scale. And so it's a fully self-contained process. You know, they've identified what they need to see. They're partnering with Grail. And so that's what we've said before, and that's what, you know, we continue to see. And I'll turn it over to Bob.

Thanks, Francis. Yeah, maybe a few other comments on it. You know, really three key elements, you know, driving towards that. One, the NHS study that we've talked about, you know, with 140,000 participants and then that expanding over the years. So that will provide, you know, an enormous set of data. We also have the Pathfinder study. which you know is which will conclude the middle of next year and you know so far the data to date has shown you know generally consistent with the early validation data so that's been very very positive to this point and then also you know a reflection the gallery reflection registry study where we'll look at the experiencing clinical outcomes of 35 000 screening eligible patients over the age of 50 who were prescribed the test from a health care provider and you know that enrollment began this quarter and that will also provide you know significant data on the on the march to reimbursement i want to amplify also what francis said though is you know even without reimbursement there is a tremendous amount of free reimbursement activity and pre-reimbursement opportunity for a gallery. And so while the march to reimbursement is incredibly important, it's not the only factor to look at.

Thank you. As we are almost at time, our last question comes from Carl Mickelson of Canaccord. So Carl, please go ahead.

Hi, thanks for taking the questions. So I just want to kind of lump into here on GRAIL. So first on timelines, I know this was alluded to earlier, but the paused EU investigation, it's been resumed. It's in early February now. And honestly, most of the decisions for trials and reviews are kind of in the first quarter of 22. So I just want to kind of ask how much clarity will be provided when these events conclude. And obviously, it's been a pretty polarizing topic. I just think it'd be helpful to understand the level of visibility regarding I guess, the regulatory outcome that you expect to have beyond the first quarter of 2022. And just one other thing to tack on here, the credit revenue performance in the quarter, it looks like it was maybe $5 million or so if we cut it straight out throughout the three months. That's annualized $20 million. I just want to understand what the maybe test volume trends are and maybe even reimbursement as well. That would be helpful. Thanks.

Yes, maybe I'll start and say, look, as we think about GRAIL and the path forward in terms of clarity, I know it's been a question that investors have asked. And so our perspective is obviously we're going to continue to work through the trials process, and I'll give you an update on that. But what we want to do is make sure that GRAIL continues to create value. Because what that means is that no matter what scenario plays out, in the event that You know, we get done and we have GRAIL and we can grow it. That's a huge, huge success, obviously, and hugely valuable for our shareholders. But we know that if we create a lot of value in GRAIL, then no matter what the regulatory outcome is, it's still a big win not only for people who are getting clean but also for our shareholders because we'll have an asset that's significantly appreciated. And even if you look at the progress that's been made at GRAIL since we announced the deal, So since we announced the deal, they've published all their study results. They have launched a product on the schedule they set in June. They have initiated, not only signed the NHS deal, but started the rollout to 140,000 customers and signed up. some other health care systems and employers in the u.s so it's clear the business has created significant value from you know uh maybe 12 15 months ago when we announced the deal and so our focus is going to be partially also just make sure that you know bob and his team have everything they need to go create a hugely valuable business and what that does is it ensures our our shareholders in some ways no matter what the outcome is it's a win for our shareholders so i want to make sure that if you were very clear that that's continuing to happen while we talk a lot about the trial. From a trial perspective, the decisions we expect out of Europe come on two fronts, right? So as you pointed out, the phase two results right now, the date is February 24th. It may slip a little, but we expect a result from phase two around that timeframe. So late Q1, maybe early Q2. We are also looking for a date in the trial around jurisdiction in Brussels, and that's also a first half thing, maybe Q1, maybe Q2. Should we prevail in either of those, then we're done with the regulatory process in the European Union. If we don't, then depending on which one, there are certain appeals processes you go through. And then still in the FTC, we expect a decision, as I said, in Q1 around the administrative process. uh inevitably there'll be a re-review or an appeal to the commissioners after that and then you go if you if we don't prevail on any of those steps then you go to district court uh probably in the back half of next year so that's the process and i'll turn it over to bob for any other color

Yeah, just on the, you know, on the revenue question. Yeah, so GRAIL revenue represents both revenue recognized from the sale of our gallery test, as well as revenues generated from our MRD collaboration agreements with biopharmaceutical companies. We expect the MRD PDX collaboration income will continue as an important component of GRAIL's revenue and as an attractive, you know, future growth element of our business. We do expect the mix of the GRAIL pharma MRD revenue components during the early launch phase to be variable from quarter to quarter. And, you know, so the overall revenue is not really, you know, because of the mix of pricing and that, the overall revenue is not a real great indicator of sample volumes.

Thank you. As we have no further questions and no time, I will hand it back to Brian Blanchett for some closing remarks.

Thank you. As a reminder, a replay of this call will be available in the investor section of our website, as well as through the dial instructions contained in today's earnings release. Thank you for joining us today. This concludes our call and we look forward to our next update following the close of 2021.

Thank you again for joining today's Illumina Q3 2021 earnings call. Today's call has now concluded. You may now disconnect your lines and have a lovely day.