Illumina, Inc. (NASDAQ:ILMN) Piper Sandler 34th Annual Healthcare Conference November 30, 2022 9:00 AM ET
Company Participants
Francis deSouza – President & Chief Executive Officer
Conference Call Participants
David Westenberg – Piper Sandler
David Westenberg
Okay. Are we ready to go? Okay. All right. Thank you, everybody, for coming. Thank you Illumina for coming. I’m just going to start off with some of the weakness in the stock yesterday. Some of the things I’ve heard from investors was, number one, some of the 5% reduction in workforce, if that came before or after, or you knew about that before or after when you gave long range guidance or even guidance for next year. And then number two was on the debt rate. So you talked about some of the refi and some of the dynamics around the refinancing and kick it off that way.
Francis deSouza
So, look, our expectations on the long range of forecasts that we gave or expectations that we gave have not changed, right? So we do expect that NGS and its ability to change how biology is done, both on the research side, on the clinical side remains unchanged, it’s large, very large markets that are growing. And the penetration rate of NGS in these markets is still at its infancy. So lots of room to grow. And as you saw from the response to our technologies and our innovations, right, we are very confident in our ability to lead and sustain our leadership in these markets.
So you brought up two things. So let me try to address both of those, right. So the first one is around the reduction in force that we announced earlier this month. So part of that was just a recognition of the macroeconomic headwinds that are currently with us, right, and an adjustment there to give us more flexibility and to provide us more ability to invest in core innovation and the customer facing parts of our business as we go into next year and beyond, right? So it was a temporary correction, not a very significant one, but still something we wanted to be also careful about, our commitment in the short-term to both operating margins, and of course, in addition to the top line.
So that’s the way you should look at it. It’s what you would expect any — the management of any company to do, and that’s what we went and then of course that part was we have made other tweaks as well. A lot of that came in the form of prioritizing a hiring, which I think we had mentioned in our Q3 earnings call as well right into prioritize hiring into the parts of the portfolio that we have prioritized, especially those leading up to innovation around our key platforms and our key solutions that we’re putting out in segments like oncology and genetic disease testing.
And then, also paying attention to our sustainable infrastructure in terms of being able to provide our products globally, and serving customers being able to address their needs, et cetera. So those two areas were really our focus. And then of course we pull back on G&A, we pull back on travel, et cetera. I mean, these are very common things that companies pull up — pull on during these times. And I think, as I mentioned earlier, right, the reduction in force also focused on making sure that we retain and sustained our ability to continue to innovate and provide high quality service to our customers at the end of both research and clinical.
Let me address your second topic, which is going to sound even more boring a little bit, which was the debt refinancing, right? And this is as is known, we have two tranches of debt that are coming due next year. We went ahead and refinanced those two tranches of debt yesterday, and it was the market conditions overall, given the last few months, yesterday were quite favorable. So we went to the market and locked in. We had a really good response. The issue was oversubscribed, so we feel happy about it. And it takes away any risk in terms of debt refinancing next year. It just gives us financial flexibility.
I want to reiterate, we are a positive cash flow company where we will continue to generate cash. So this is just about more financial flexibility as we head into the future years. And the debt was all short-term debt anyways.
Unidentified Company Representative
I would add one point, when we were at earnings time, which was just earlier this month, we already had these discussions about the reduction in force as well as the financing well under way. There’s nothing you can do overnight. So that was contemplated in the comments that we made during the earnings call.
David Westenberg
Okay, perfect. So let’s actually move to one of the bigger topics, and it is GRAIL. Now I fully — I personally believe that you have enhanced the value of GRAIL, and you can continue to enhance the value of GRAIL. I mean, that would be argued to probably some of my buy side counterparts. But saying that you can enhance the value and actually market conditions are going kind of in two different ways for cash burning assets. So, as we think about timelines to spinning off, you have two factors going, the enhancement of value that you can provide to GRAIL, but it’s offset with the fact that you’re burning cash. So, with those two things in mind, I mean, how do you think about timing and in terms of spinning up GRAIL? And this is, of course, under the assumption that EU continues its course that in EU seems to be taking?
Francis deSouza
Yes, so lots in that question, right? So first, about the asset about GRAIL and where Illumina had contemplated in its original pieces to add value to GRAIL, right? So, look, GRAIL had has a unique asset and for most part, and actually for on all fronts, right, the uniqueness of the asset and the value of the asset has played out. So they did launch their Gallery product on time. That continues to be from a clinical trials and testing perspective, the most complete clinical dataset that that is out there by far, right by an order of magnitude in terms of number of patients they’ve analyzed. It is still the only multi cancer early detection test that gives you results of over 50 cancers, many of those don’t have alternative screening technologies today.
As opposed to everything else that you’ve seen in the market being tried out for maybe one, or maybe a handful of cancers at the most, right? And again, it’s the only one that can pinpoint the location of the cancer, which is really important if you’re going for a blood test. And I think the recent ESMO guidance actually provided some really good data in terms of the real world evidence now that the test has been out on the market for a while. The real world evidence actually matching that of the clinical trials, which is it seems like of course, it should, but there are many tests that that failed to provide that sort of evidence coming through.
And lastly, I would say that the other concern with screening tests was a little bit of how patient’s react to it. Would they be okay with knowing they had a cancer or knowing that there is some level of false positive and false negative on the test. And the response from patients was overwhelmingly positive, right. So these are all things that were uncertainty with a test like GRAIL, which have all been retired. And I think it’s proven out our original thesis in terms of the value it can bring to patients and really to healthy individuals who are at risk of cancer. And by detecting that cancer earlier, you can shift the curve of survival from cancer.
So now the ways Illumina had looked at adding value to it was really to take GRAIL and to be able to expand its ability to get to health systems, to get to government health systems, faster and globally, right. GRAIL had no plans initially to expand beyond the U.S., and of course, that’s where Illumina thesis lay [ph]. And finally, also to be able to provide the test in a distributed format more easily. And again, because of the whole separate we have really not gotten started on any of the thesis or thesis on scale addition, et cetera. But I think there are certain areas where the association with us has definitely helped.
With respect to divestiture and cash burn. So, first of all, the cash burn from GRAIL was anticipated in our investment thesis, right. So it isn’t something that has caught us by surprise. We knew what it took to bring on a platform like GRAIL that for us provided long-term value, long-term growth opportunities that very few other assets were provided. So that — none of that was a surprise, none of that was something that we didn’t anticipate. I think in terms of your — what we hadn’t anticipated to be fair, it was for a vertical acquisition or a vertical asset like GRAIL where that’s not part of our core business. It’s not in the same area that we would get opposition from the regulators, right?
And so two parts to that. That was a surprise, I will say that. I think what you saw with the FTC, Administrative Law Judge decision is that from a economic theory and a legal theory, the FTC zone judge basically corroborated what we have been saying all along is, this is pro-competitive. There are no issues with anything around the deal, right? So put that to the side, but that is an important fact, in terms of our approach to acquisitions and our approach to this particular acquisition.
The European side is where what you brought up even part of that was, we do expect that the European Commission will come back to us with guardrails or more details about what a potential divestment order could look like, right. And at that point, I will reiterate what we have said. Believing the thesis, we believe in the asset, but in the face of a divestment order, we will be pragmatic in our approach and proceed expeditiously if we have to divest and given the guardrails that the EC sets us. But this process will take time because it’s not an overnight process. Whatever divestment guardrails the EC gives us will take — we expect at least 9 to 18 months, at the least to go, execute on it, right. So we’ll plan, but I can’t give you any more details on how that will be conducted right now, because we don’t have details on what the EC comes back to us with.
David Westenberg
Got you. Okay. Currently in the market, there aren’t really strong competitors yet selling instruments like in commercialization phase. I mean, like, I think people will make an argument there’s some good emerging players, but right now they’re not there yet. They could be next year or year after that. Now as consumables has slowed down and companies have existing project scope, can you walk us through why consumables or why there’s so much softness in the market right now, considering you haven’t launched your new product yet. So they and there’s only one place, they still need to buy NovaSeq consumables. So help us walk through that. And as a kind of an add on to that, before the original NovaSeq, you did see good consumable growth. And it was kind of maybe different now than that was different than was then.
Francis deSouza
Yes, so I would differentiate between consumables revenue this year versus utilization at the customer level on our instruments, both high throughput and mid throughput where most of this competitive noise has come on, right. So, first of all, we can track consumers, the utilization very, very clearly, because we — about 60% to 70% of our high throughput or mid throughput instruments in North America and Europe are connected, which means we can monitor activity on these instruments very, very closely.
And we have seen that, in general, the activity on these instruments, both on the research side and the clinical side has not slowed down, right. So that’s a good thing with two exceptions that we called out during our third quarter earnings call. One was around some of the large research/[indiscernible] customers, they have told us that they they’ve had some challenges in recruiting newer patients, so we did see a slowdown in activity. And that is temporary to the extent that these — they’re not changes in funding, they’re not changes in intent. They have to rejigger their recruitment strategies. And they expect they will be back online in the coming months. And we’ve seen this before, right. We saw this at [indiscernible] where we initially they had, this was back in 2018.
So they had some slowdowns. They changed how they recruited patients, and they went back and they completed their intent. So that’s one area where there was some — there was some slowdown or at least a reduction in the rate of activity. The other one that we did see was customers in Europe, research customers in Europe. There were — there was a slight downtick in their utilization. Again, that’s not surprising and not something that others haven’t seen as well.
If we, when we speak to these customers, it is a bit on cautiousness and on some of the macroeconomic headwinds, and they have seen a lot of inflation related fees, which eats into their spending power a little bit more. So again, not surprising from our end. Again, it’s not a structural change, nothing’s change and what they want to do and the importance of NGS to their overall piece of, I will put that up. But barring that, right, clinical activity remains strong. Anything else to do with research has remained surprisingly strong as — especially as customers move up to mid throughput, for example, to our next 1k, 2k areas.
So I will — this is activity, what you’re seeing softness in is around purchases, right. So there are two things that have affected us this year. One is a little bit of inventory deleveraging. So people look into uncertain economic times and the improvements in supply chains overall, they decided that some of the inventory levels they’ve had before they can afford to reduce them. So they burned through some of that, right, there are limits to how much that can be done. That’s why we expect as we look forward into 2023, that we will see that correct itself and purchases of consumables were more closely stock tracking.
The other thing I will say, and you brought this up in the context of competition, we have continued to see very good uptake of our instruments. So of course, and obviously 6000s had a record first half of the year. And we have had very, very strong sales, even in the face of all the announcements from mid throughput players, very strong sales of our next 1k, 2k franchise where it’s a 40% growth in Q3 and we continue to see very strong interest in that platform. So we are, cautiously optimistic about once we get through these temporary macroeconomic headwinds, we’ll see the utilization on these instruments that are being purchased, pick up and go back to the trend line in consumables growth that we had seen earlier.
David Westenberg
Got it. Thank you. And then with the — I mean, I think the investment thesis is evolving really quick with a new instrument launch. So how should we think about your order book? Are you planning on giving updates on the order book as we transition particularly, because you did give guidance for next year that was below the 5-year guidance. I think it’s pretty reasonable that that would happen in the face of an instrument launch. But wait, are you planning on giving us context in terms of that order book?
Francis deSouza
Yes, we will provide. So just again, what we did state and our earnings call, even just after a month, right, we had 50 confirmed orders, and then 170 instruments in our pipeline, which is the latest stage pipeline where we have, we’ve identified customers who have a dedicated budget, and so they can purchase the instrument and they have given us a timing of when that they want to have that instrument on their premises, right. So that’s 170, that number, and we have a much larger pipeline of people that have expressed interest, but we are going through, validating and betting their ability to pay and exactly when they want the instrument.
We will provide you updates so that, as you can imagine the order book and the pipeline have continued to grow since then we’ll provide a next update at JPM. So please hold till then. But it continues to match our expectations. And we continue to see interest globally, right. So we come back to some of the features that have really enhanced both global interest and interest across our segments, both research and clinical.
David Westenberg
Yes, it’s actually a good segue [ph]. I mean, I think that we’ve always seen good elasticity and demand in academic, but you did mention on the last call that clinical growth customers are adopting ex at a faster rate than you expected. When you’re talking to these clinical customers, are they planning on building new assays, larger assays on NovaSeq X? Or are they just trying to get lower cost of goods sold by adopting X?
Francis deSouza
Yes, so yes, it’s been a pleasant surprise to see clinical customers kind of adopt X early, right. And so what they have told us and they did have conversations with us on is their existing pipeline of assays that have been validated on the 6,000. They’re going to continue. So you will expect to see expansion of their fleet on over 6,000, because they as they expand those, the throughput of those assets. And that’s purely because once you validate on a particular platform, for clinical applications, you don’t generally tend to change that very quickly.
A lot of what they are excited on the X bar is really around new assays, which do two things, right one, sometimes they are looking to sequence at a higher depth for more sensitivity. And this becomes really important in applications like either cancer and things like MRD, where you’re looking for a very weak signal. And literally like finding a needle in a haystack, or you’re looking for more breaths. So you’re looking not just at single gene or a few genes, but you’re looking across the genome and or at multiple sites across the genome.
So — and in some cases, both [indiscernible], you could have things where you look — you’re looking at circulating tumor DNA, but you want to expand the aperture a little bit and look across a bigger part of the genome. So, and you’re seeing this starting to happen, definitely oncology side, but, but also as you move into rare disease diagnosis, right, you want to have a wider lens, you want to go from small panels to larger panels, eventually looking at a clinical whole genome. So we are starting to see that those sorts of ideas, kind of percolate with customers, both on the clinical side, but also clinical research. And I think you’re going to see much more of that going forward as well.
David Westenberg
You — did you care to maybe give us I mean, you don’t have to necessarily throw out the exact customers, but maybe some of the conceptualization of this. I mean, is it like maybe you had an MRD company that was looking at a tumor or informed approach, and now they have higher throughput. So they’re going to go with a tumor agnostic approach, or a company shifting from wanting to go from whole exome to whole genome on their assay. I mean can you give any conceptualization to help us understand really how they’re going to take this throughput, and they’re going to become bigger customers of Illumina.
Francis deSouza
Yes, let me throw a couple of examples that you’re right. So we definitely are seeing, especially in the MRD side, people that are moving from smaller, more focused panels to larger panels, and eventually doing a clinical whole genome initially, right. So it would still be tumor informed, but the information that they capture with the first assay is much bigger, much wider. So that’s one set of things.
The other set of things is — and Regeneron, we mentioned this in our Investor Day, right? So one of the quotes we got from them as they looked at the Xs, they had — they always make and every company does is, they stated it is they do a cost-benefit analysis, right? So what does — what do you get out of an exome, what does it cost you? And then at some point, they know that there’s much more information at the genomic level. And as the amount of information and the utility of the information you get from an exome starts hitting a — you’re the top end of the X score [ph], right, it makes sense to move to the genome. And at some point, it’s a cost that says there’s cost benefit to moving to now to a whole genome approach because the constant [ph] has come down in that range that it makes — tends to now start investing in the genome, right?
So we are in that level of movement if even a company like Regeneron starts thinking about now we want to move from whole exome to whole genome, right? It definitely signals a bit of a transition there. And we are seeing this. And then maybe the third thing I will mention is this is more in the population genomics side of things, but I think you can see parallels on the clinical side as well where people were initially just focused on just doing DNA. There’s a lot more talk on saying, can we do a more complete multiomic assessment of the same sample, right?
So can we look at DNA and in RNA, or you can do a DNA and the proteomic signature in the same sample. And can that lead to better clinical insights or better drug discovery — drug and target discovery insights than doing just a genomic analysis could. So we are definitely starting to see those trends and customers coming back to us and saying, NovaSeq X enables this and enables this now.
David Westenberg
We are really have time for maybe one question, probably a short answer here. But the year is 2027, you’re back here at the Piper Sandler Healthcare Conference. You’re talking about over the last 5 years, what are you most proud of that you accomplished over the last 5 years?
Francis deSouza
Wow, that’s — and you want a short answer for that, okay. Look, I think there are two or three things I will highlight, right? And this goes back to what I said earlier about us being really in the infancy of the power of NGS and what it can bring to biology. What NGS does is it allows you to answer biological questions at a greater depth and at scale. So our vision for 2027, if you will, and beyond, is really that there’s a lot more science that starts bringing in NGS as the first element and the most essential element, right? So more kind of comprehensive biological and molecular testing of samples, both on the research side, right?
But as the science starts developing, you start getting these assessments into the clinic. So you start getting into whole genome sequencing on every sample, right? And it’s cost effective and the information is there. But also a whole multiomic analysis, right? So a transcriptomic analysis and a proteomic analysis become just standard of care, but also standard as a research toolbox, as standard as peering into a sample what microscope is today. So that’s our vision.
I think we are actually quite close to getting to that vision with some of the technological advances that we and our partners have made, right, because there’s advancements on the proteomics side, which are feeding and their advancements on some of the spatial single cell side that are absolutely feeding into getting more information, getting more insights into disease, into better health, into treatments with this. And of course, at the end of the day, our mission is to provide better access and better human health through genomics, right? And I think all these are pointing towards that, saving lives, getting to longer lifespans, longer, healthier lifespans through the use of NGS.
David Westenberg
Thank you.
Francis deSouza
Thank you.
David Westenberg
Thank you.
Question-and-Answer Session
Q –
[No formal Q&A for this event]
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