Company Name: Illumina Inc

Company Ticker: ILMN US

Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 1 of 17
Q2 2014 Earnings Call
Company Participants
Rebecca Chambers
Jay T. Flatley
Marc A. Stapley
Other Participants
Tycho W. Peterson
Doug A. Schenkel
Derik de Bruin
Dan Anthony Arias
Ross J. Muken
Amanda L. Murphy
Dan L. Leonard
Isaac Ro
Jon Groberg
Bill R. Quirk
Zarak Khurshid
Peter R. Lawson
Bryan P. Brokmeier
MANAGEMENT DISCUSSION SECTION
Operator
Good day ladies and gentlemen, and welcome to the Q2 2014 Illumina, Inc. Earnings Conference Call. My name is
Whitley and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay
purposes. I would now like to turn the conference over to your host for today, Ms. Rebecca Chambers, Senior Director
of Investor Relations. Please proceed.
Rebecca Chambers
Thank you. Good afternoon everyone, and welcome to our earnings call for the second quarter of fiscal year 2014.
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 Jay Flatley, Chief Executive Officer; Marc Stapley, Senior Vice President and
Chief Financial Officer; and Francis deSouza, President. Jay will provide a brief update on the state of our business,
and Marc will review our second quarter financial results archived in the Investor section of our website.
It is our intent that all forward-looking statements regarding our expected 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
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 2 of 17
discussed. All forward-looking statements are based upon current information available, 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.
Before I turn the call over to Jay, I would like to let you know that we will participate in the Morgan Stanley Healthcare
Conference in New York the week of September 8. For those of you unable to attend, we encourage you to listen to the
webcast presentation, which will be available through the Investor Relations section of our website. With that, I will
now turn the call over to Jay.
Jay T. Flatley
Thanks Rebecca, and good afternoon everyone. I'm delighted to report that Q2 was another exceptional quarter for the
company. Our business continued to demonstrate strong underlying trends across all geographies and in nearly all
product lines. As a result, Q2 revenue increased 29% year-over-year to $448 million, our 11th consecutive quarter of
sequential revenue growth, and our best year-over-year growth rate since Q2 2011.
Second quarter total sequencing revenue grew 44% year-over-year, driven by impressive demand for consumables, our
new instruments and NIPT testing. These results clearly demonstrate the breadth of our portfolio with options for
customers across all experimental scales and applications.
Sequencing instrument revenue grew 51% compared to the second quarter of 2013, fueled by strong demand for HiSeq
X Ten and the NextSeq 500, while MiSeq and HiSeq also exceeded our expectations. Once again cannibalization
between our systems was insignificant and will be irrelevant looking forward as the manufacturing processes for each
product are equivalently scalable, including HiSeq X Ten.
As you all know, manufacturing capacity for HiSeq X Ten had been governed by supply of the high resolution cameras
and the pattern flow cells. As we began the second quarter, volume production of the pattern flow cells had only
recently begun, but I'm pleased to report that this process has steadily improved, and we no longer expect flow cell
production to be a gating factor for HiSeq X shipments.
As a result of this progress, we recorded revenue on a significantly higher number of HiSeq Xs in Q2 compared to Q1.
We anticipate the future shipment rate to be largely determined by our customers' readiness to absorb the systems,
which we expect will extend into the first half of 2015 for announced deals.
The unprecedented demand for HiSeq X Ten has exceeded our most aggressive assumptions, and moving into Q3 I'm
pleased to report that this trend continued. Since the last earnings call, we've received four additional orders, the first
from the Baylor College of Medicine and the second from Sidra Medical and Research Center, as well as two
additional customers who have chosen not to be disclosed at this time. These additional orders bring our HiSeq X Ten
customer count to 13, for a total of 144 HiSeq Xs. We're no longer planning to necessarily announce each order, as
individually they're not material given our large shipable backlog. That being said, we have a strong tunnel of
opportunities for the remainder of this year and into mid 2015.
Both the Genomics England and the Sidra Medical and Research Center announcements highlight that population
sequencing is beginning in earnest. We were very pleased to recently disclose alongside Genomics England that
Illumina Cambridge would be the preferred partner for the sequencing portion of the 100,000 genomes program. While
there are not many details I can share about our role in this project today, we are working towards a definitive
agreement, and we'll be happy to provide additional information when possible.
The creation of a high throughput genomics center at the Sidra Medical and Research Center in Qatar is another notable
milestone for population studies. The center will focus on human whole genome sequencing for rare genetic disease in
addition to their work on population studies. The facility will help advance genetic mapping projects, including the
creation of the Arab consensus genome. These population sequencing programs are just two of the many that are being
discussed globally, and we look forward to providing further updates as these projects reach greater maturity.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 3 of 17
Overall demand for the HiSeq family of products has increased over the last few quarters, and this trend continued in
Q2. Shipments were higher both sequential and year-over-year as ASPs improved due to customer purchases shifting
toward HiSeq 2500 and X Ten, and away from HiSeq 1500 and 2000. Demand for the HiSeq 2500 benefited from 10
multi-unit orders, including HiSeq X Ten customers looking to supplement their fleet for applications outside of whole
genome sequencing.
Approximately half of the HiSeq 2500 demand came from existing customers looking to build out capacity and gain
access to the 1 terabase or 1T chemistry. We began to see evidence of an upgrade cycle during the quarter as customers
with older generation instruments placed HiSeq orders to capture the benefits of 1T. We expect this trend to continue
over the next year or two as customers with older generation HiSeq instruments assess our portfolio to determine which
instrument will be optimal given their applications, work flow and economics. Approximately one-third of 1T-eligible
instruments have purchased the required upgrade, and we expect this figure to increase dramatically in the third quarter.
In Q2 we reached a historic milestone for HiSeq products as we surpassed $2 billion in shipments since inception,
cementing HiSeq as the most successful next-generation sequencer ever. HiSeq 2500 remains a very important part of
our instrument portfolio with a long roadmap ahead of it, including regulatory clearance and read length enhancements.
One such enhancement, the 2x250 read length kits will ship in the fourth quarter, and we're on track to submit the
HiSeq NIPT assay to the FDA.
Additionally, the TruSeq synthetic long read kits are now shipping. Based on the molecular technology we acquired in
2013, this kit includes a streamlined library prep method with master-mixed reagents, improved chemistry to reduce
bias and integration with BaseSpace to enable a full sampled answer workflow, generating high-quality virtual reads of
up to 10 kb. This new library prep kit works across a much broader set of applications, including genome finishing,
meta genomics, de novo assembly, meta assembly and human genome phasing.
Moving to NextSeq, our product launch activities continue to generate significant interest, resulting in sequentially
higher orders and shipments in Q2. Importantly, NextSeq has hit a sweet spot with oncology, NIPT and microbiology
customers due to the breadth of applications and the flexibility of the workflow. As an illustration of this, half of orders
came from commercial customers, many of which are exploring the use of NextSeq in a translational or clinical
production setting.
Feedback on NextSeq continues to be very favorable, due in part to the exceptional performance of the instrument in
customer hands. Both quality scores and output are exceeding specifications, as we're regularly seeing greater than 85%
Q30 performance in selected runs approaching 140g. This, along with the early customer data has supported demand
for NextSeq, and we look forward to a continued successful rollout of this instrument.
Cannibalization of MiSeq by NextSeq was insignificant again this quarter as the platform's uniquely suited for
particular applications and customer groups. MiSeq orders benefited from our trade-in program for third party
instruments as well as a bundling promotion, which offers a discount to customers when both a NextSeq and MiSeq are
purchased together.
Customer dynamics for MiSeq are largely unchanged from the trends we saw in prior quarters with approximately
two-thirds of instruments ordered by government, commercial, translational and clinical customers, and close to 70% of
the orders from new customers. Additionally this quarter we once again received follow-on multi-unit orders from
existing customers building capacity in production facilities, and from public health institutions including the FDA and
the CDC.
Moving now to arrays, this quarter total microarray revenue declined approximately 10% year-over-year as growth in
genotyping services and IVF was more than offset by a decline in our Infinium genotyping business. This was
primarily due to the completion of a large multi-year bio-banking project and lower demand from a consumer
customer, as opposed to a change in our market share, which we estimate to be stable at approximately 80% of the
genotyping market. As a result, we're updating our expectations for the array business in 2014, the impact of which is
included in the guidance we provided today. For the full year we now expect this business to be down mid- to
high-single digits, due in part to the factors noted previously, as well as the absence of revenue from our Eco PCR
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 4 of 17
products which were previously reported in the array line. Beyond 2014, we expect this business to stabilize if not grow
due to the impact of consumer, agriculture and IVF demand.
We remain focused on delivering complete sample to answer work flows, enabling new markets to embrace NGS
technology through a variety of applications. As part of our strategy, we continue to enhance our bioinformatics
capabilities. BaseSpace now has a total of 38 apps and we're tracking having approximately 50 available by year-end.
During the quarter we also enhanced the BaseSpace Onsite product, which now includes our VariantStudio analysis
tool and native apps, which previously had only been available in the cloud offering of BaseSpace.
Our sample to answer products announced at the January Investor Day remain on track for delivery this year, and we
look forward to updating you on the demand trends for NeoPrep and MiSeq forensics over the coming quarters. As a
demonstration of the diversification of our business, again this quarter commercial, non-profit and hospital customers
accounted for approximately half of shipments, and in the Americas clinical orders grew more than 50% in the first half
versus the prior year.
Sequencing uptake in the oncology market also continues to gain significant traction. In the second quarter, sales to
research, translational and clinical oncology customers grew more than 30% versus the prior year to approach $90
million in shipments. Our efforts to bolster adoption in this field are also progressing well. The Actionable Genome
Consortium, which consists of the major cancer centers, as well as other key stakeholders including Illumina, has
reached consensus on a broad set of standards for using NGS in the clinic and plans to publish their recommendations
next year. Feedback from customers points to standards being a critical factor to drive the adoption of NGS in the
clinic. Additionally, we continue to further our discussions with pharma partners regarding the development of our
onco panel, and hope to have announcements to share on this topic in the coming quarters.
This week Dr. Tina Nova joined Illumina as General Manager of our Oncology Business. Tina's a great addition to our
team, and we're delighted to have her on board. Her group will execute on the strategic vision Dr. Richard Klausner has
put in place as CMO and Interim General Manager of Oncology. I'd like to thank Rick for the dynamic leadership he
provided over the last six months in this acting role.
As part of our clinical readiness strategy, we recently completed the acquisition of Myraqa, a regulatory and quality
consulting firm specializing in IVD and companion diagnostics. The team is nationally recognized due to their deep
regulatory, quality, clinical, biostatistics and IVD development expertise. As we move into the clinical market,
obtaining regulatory approval for our products and the products of our partners has become increasingly important.
With the addition of Myraqa, our regulatory team has now tripled in size, allowing us to run a broad parallel portfolio
of regulatory products through our pipeline. Myraqa accelerates our vision of advancing the adoption of genomics in
the clinic, and we're very pleased to welcome Mya Thomae and her team to Illumina. The financial impact of this
transaction was included in the guidance we provided in April.
In reproductive and genetic health, we made significant progress during the second quarter in both IVF and NIPT. We
successfully launched our new pre-implementation genetic screening product, VeriSeq PGS, on the MiSeq platform,
and it will also be available on NextSeq later this year. The NIPT market continues to grow, and we're very pleased
with the performance of our business in the second quarter; verifi volume and service revenue came in at record levels.
And additionally we received New York state approval for average risk testing and announced technology transfer
agreements with Biomnis, Genoma, and the Center for Human Genetics and Diagnostics. Under these agreements, they
will use the HiSeq 2500 to develop and perform NIPT. We're in discussion with more than a dozen other potential
customers for similar technology transfers.
Additionally, we recently announced an agreement with Berry Genomics to co-develop an NGS system to provide a
cost-effective, easy-to-use assay for NIPT in China. This system has already been validated in the clinical setting, and
is in late stage review by the Chinese Food and Drug Administration.
In summary, Q2 was another remarkable quarter with strong uptake of our new sequencing platforms, coupled with
rapid expansion into new markets. In particular, the progress we've made in the clinical market validates our strategy
and the utility of sequencing in healthcare. We're confident in our technology leadership and believe we will continue
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 5 of 17
to deliver significant growth as we unlock the power of the genome.
I'll now turn the call over to Marc, who will provide a detailed overview of our second quarter results.
Marc A. Stapley
Thanks, Jay. As Jay described, Q2 marked another exceptionally strong quarter for Illumina. Revenue grew 29%
year-over-year to approximately $448 million as a result of significant uptake of our HiSeq X Ten and NextSeq
instruments, record sequencing consumables, and stable demand for MiSeq and HiSeq products.
Globally, demand for our products remained strong during the second quarter. Shipments in the Americas grew 19%
year-over-year, and Europe saw a 45% increase over the same period last year. In APAC, shipments grew
approximately 50% year-over-year.
Instrument revenue grew 48% this year to reach $140 million in the second quarter due to the introduction of HiSeq X
Ten and NextSeq. The demand across our sequencing portfolio continues to demonstrate that each of our products
plays a key role in the sequencing ecosystem and collectively meets our diverse customers' needs.
Consumable revenue in the quarter was $247 million, an increase of 15% compared to the second quarter of 2013,
primarily due to higher demand for sequencing consumables which was partially offset by a decline in array
consumables. Consumable revenue represented 55% of total revenue, down from 62% in the prior year period and
lower than the 58% we saw in Q1 due to the strength in sequencing instruments and maintenance contracts during the
second quarter.
Sequencing consumables grew 34% over Q2 of last year due to our larger installed base of instruments including the
addition of HiSeq X Ten and NextSeq to the portfolio. HiSeq and MiSeq consumables reached record levels during the
second quarter. This translated to MiSeq utilization towards the top of our projected range of $40,000 to $45,000.
MiSeq pull-through continued to benefit from a large number of accounts running at full production levels. In fact,
approximately a quarter of MiSeq consumables were ordered by these production level accounts, most of which were
clinical customers, as MiSeq is now being routinely used in lab developed tests and diagnostic settings for oncology,
HLA and microbiology assays. Given this trend, we continue to protect MiSeq pull-through of $40,000 to $45,000 per
year.
HiSeq pull-through for instruments, excluding HiSeq X Ten, was in our projected range of $300,000 to $350,000. In
the third quarter we do expect consumable utilization to decline modestly across all platforms as a result of typical
seasonality associated with the vacation season. While it is too early to provide an estimate of NextSeq or HiSeq X
pull-through, both instruments generated healthy consumable purchases during the quarter. HiSeq X Ten consumables
in particular were meaningful, as customers performed validation studies and initiated their whole genome projects.
Services and other revenue, which includes genotyping and sequencing services, instrument maintenance contracts and
revenue from verifi sales, grew close to 75% versus Q2 2013 to equal $57 million. This improvement was driven by
ongoing growth in our extended maintenance contracts associated with our larger sequencing installed base, strength in
genotyping services and growth in NIPT services, which benefited from test fees as well as increased verifi revenue.
Turning now to gross margin and operating expenses, I'll highlight our adjusted non-GAAP results, which include legal
contingences, non-cash stock compensation expense and other items. I encourage you to review the GAAP
reconciliation of non-GAAP measures included in today's earnings release.
Our adjusted gross margin for the second quarter equaled 70.9% compared to 70.4% in the first quarter as the impact of
the lower mix of consumables was more than offset by improved sequencing instrument margins. Year-over-year gross
margins expanded 140 basis points as a result of improved instrument and services margins. Adjusted research and
development expenses for the quarter were $70 million or 15.6% of revenue, slightly higher compared to $65 million or
15.5% of revenue in the first quarter due to increased labor and clinical trial expense.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 6 of 17
Adjusted SG&A expenses for the quarter were $92 million or 20.5% of revenue compared to $84 million or 19.9% of
revenue in the previous quarter. The increase was primarily due to consulting expenses associated with our Global
Business Process program, as well as additional outside services and labor expense. Adjusted operating margins were
34.8% compared to 34.9% in the first quarter and 32.3% reported in the second quarter of last year. These were higher
year-over-year due to the impact of improved gross margins and operating expense leverage.
In the second quarter we recognized approximately $700,000 of adjusted other income. Our non-GAAP tax rate for the
quarter was 29.8% compared to 30.7% in the second quarter of last year, which at that time included the quarterly
impact of the 2013 R&D tax credit. Non-GAAP net income was $85 million for the quarter, and non-GAAP EPS was
$0.57. This compares to non-GAAP net income and EPS of $60 million and $0.43 respectively in the second quarter of
2013. We reported GAAP net income of $47 million or $0.31 per diluted share in the second quarter compared to net
income of $36 million or $0.26 per diluted share in the prior-year period.
Current period results include $31 million recorded in other expense net for the extinguishment of debt associated with
the 0.25% 2016 convertible repurchase, as well as $5 million recorded in cost of goods to reflect the ongoing royalty on
BeadChip sales associated with the Sentrix litigation, including interest.
We generated cash flow from operations of $178 million during the second quarter, higher than previous quarters due
to increased cash collections combined with a reduction in tax and compensation related payments. DSO decreased to
53 days compared to 63 days last quarter as a result of both the more linear shipments and our collection efforts.
Capital expenditures were $23 million resulting in $155 million of free cash flow. During the quarter we repurchased
approximately 508,000 shares for $72 million as part of our discretionary repurchase plan, and we now have $165
million remaining under our previously announced programs.
Additionally, we placed $1.15 billion of convertible senior notes, significantly improving the maturity of our debt
which now comprises $320 million due in 2016, $633 million due in 2019 and $517 million due in 2021. We
repurchased $600 million aggregate principal amount of the existing 2016 convertible senior notes for a total
consideration of $1.24 billion which removed approximately 3.5 million shares from our diluted share count. Note that
the 15 million warrants associated with the call spread on the previous 2014 debt have now been extinguished. We
ended the quarter with $1.1 billion in cash and short-term investments.
Given our strong first half results and our ability to largely satisfy HiSeq X demand, we have updated our guidance for
2014. We now project revenue growth of 25% to 26% year-over-year, an increase from the previous guidance of 21%
to 23% growth, and non-GAAP diluted EPS of $2.26 to $2.28, higher than our prior guidance of $2.10 to $2.15.
Additional modeling considerations include full-year weighted average non-GAAP diluted shares of 149 million, which
assumes a stock price of $175 and a full-year pro forma tax rate of 29% which includes the 2014 federal R&D tax
credit that has yet to be enacted. If the tax credit and other tax extenders are not passed, our annual tax rate would
increase by approximately 200 basis points.
In summary, we delivered strong second quarter results and are projecting significant growth through 2014 and beyond.
We continue to drive technology leadership with market expansion to become the clinical standard enabling us to
address the more than $20 billion market opportunity ahead of us.
Thank you for your time. We will now move to the Q&A session. To allow full participation, please ask one question
plus a related follow-up as necessary, keeping it to two questions at most. Operator, we'll now open the lines for
questions.
Q&A
Operator
[Operator Instructions] Our first question comes from the line of Tycho Peterson. Please proceed. With JPMorgan.
Please proceed.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 7 of 17
<Q - Tycho W. Peterson>: Thanks for taking the question. Nice quarter, guys. Just first on the population efforts, with
Sidra now in the press release, can you maybe just talk a little bit about what the backlog looks like for additional
population studies and any numbers you can put around the Sidra effort in terms of placements?
<A - Jay T. Flatley>: Well when we use the word backlog, Tycho, we actually consider backlog to be orders that are
unshipped, so beyond Sidra, there's really nothing in backlog. In terms of what the prospect channel looks like, of
course Genome England, we've announced that we were the preferred provider there. We've not yet signed an
agreement, so until we sign that agreement, we won't actually have a purchase order and have that in backlog.
But beyond those two, we're working around the globe with probably 10 to 15 potential prospects and these in that
pipeline range from customers who are very early on in their thinking to ones that are much more advanced. We
suspect that it will take some number of years for these to begin to roll out in volume, but we continue to be quite
optimistic about the concepts around population sequencing and that when you look out over a three to five year
window, that will become a significant part of our business.
With respect to Sidra specifically, the first purchase order was for a HiSeq X Ten and some related equipment that goes
along with that. The next set of questions will be the pace with which they begin to do population sequencing and if
that accelerates dramatically over the next year or so, will they need more instruments, and we just don't know the
answer to that yet.
<Q - Tycho W. Peterson>: Okay. And then as a follow-up, can you talk a little bit about the Berry collaboration, what
the thought process was there? Are you expecting this to kind of accelerate into average risk maybe faster than the
U.S.? How do you think about the dynamics of the market and maybe revenue impact?
<A - Jay T. Flatley>: Yes, we do expect it will get to average risk populations faster in China. With the birth rate in
China, the market opportunity there is absolutely enormous and as most of you probably know, the CFDA in China put
a stop to routine NIPT testing. They allowed some labs to continue to do the testing in order to generate clinical
information, and we've been clearly working with some of those laboratories with Berry. They are working with us in
partnership around some changes to the instrument to have it manufacturable in China, software changes, some
specifics on the sample preparation to have a product that is suitable for the Chinese market that sequences at the right
depth for the kind of test that's required in that Chinese market. And as we mentioned in the script, we're in late stage
evaluation through the agency in China.
<Q - Tycho W. Peterson>: Okay. And if I could just ask one clarification. Did the timeline on NeoPrep slip? I think
you'd originally said over the summer. And I'll hop off now.
<A - Jay T. Flatley>: I would say it slipped but a few months, Tycho, and that's really because we want to do very
extensive testing of this product before we put it into the market, because we're going to deploy six assays on this
platform before the end of the year. And the sample prep market's extraordinarily important for us, and we think we
will place a lot of instruments quickly once we start shipping this. We want to make sure that this instrument and the
associated assays are extraordinarily robust. So we've added a couple months of testing into the program timeline, and
so it has slipped a bit.
<Q - Tycho W. Peterson>: Okay. Thank you.
Operator
Your next question comes from the line of Doug Schenkel with Cowen and Company. Please proceed.
<Q - Doug A. Schenkel>: Hi. Good afternoon. Thanks for taking the questions. Maybe just starting with a follow-up to
Tycho's, one of Tycho's questions. Clearly the recent announcement with Berry Genomics highlights the fact that
NextSeq was designed to clearly have a role in NIPT. As we think about the outlook for NIPT in the non high-risk
market and the need for a lower price, lower cost solution, would you be willing to comment a little bit on how
important a role NextSeq is supposed to have in reducing the cost and helping you move more aggressively into the
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 8 of 17
low-risk market?
<A - Jay T. Flatley>: Yes Doug, I say that NextSeq is a very, very important product for us in NIPT and probably the
way to best think about this is, in the environments where NIPT testing is very centralized, which we think will be
probably more the case in the U.S., that HiSeq will be the better option because it's very large sample flow and the cost
per read is lower on a HiSeq than on a NextSeq. However a large share of the world's market, and particularly as we get
into more average risk testing, will become more distributed. And in that case, the NextSeq is absolutely the perfect
product because it multiplexes at the right kind of level to deal with the more moderate sample flows that you'd have in
a distributed environment. So for the broad Chinese market where there may be 3,000 hospitals that could be doing
NIPT testing, NextSeq is a much better product for that environment than HiSeq, even with a slightly higher cost per
read because you don't have the dead time in between runs, and the impedance match is better to the sample flow.
NextSeq is the ideal product.
<Q - Doug A. Schenkel>: Okay. And then if I could just follow up on, I guess follow up with just a longer term
outlook question. Illumina's clearly one of the few companies out there with a revenue base of over $1 billion that can
still generate mid to high 20%s revenue growth. Your clearly playing from a position of strength right now, and you
have the currency to pursue a lot of different directions. I make these observations six months after you named a new
president, who yields from the tech industry a few weeks after you acquired clinical expertise with Myraqa and in the
midst of a summer where you're talking about doing more in areas such as liquid biopsy and just added Tina Nova to
the team. It just seems like there are some signs that Illumina may not be content to be just an arms dealer over the next
few years.
You know, as we sit here a few weeks in advance of when you typically go into your planning and budgeting meetings
for the upcoming year, it seems like a good time to ask how you're thinking about the future. And I'm not suggesting
there is any thought that you're not going to continue to dominate your core market and drive the pace of sequencing
innovation. What I'm really wondering here is if you're thinking that this is the time to increasingly use your strength to
move beyond just being an arms dealers, And if so, how should we think about the outlook for investment and strategic
development over the next year or two?
<A - Jay T. Flatley>: I think that there's really been no change in our strategy here and I guess I would characterize
our strategy as one that goes beyond being an arms dealer but not one that is a company that is selling clinical tests
directly to physicians and running them in our own laboratories other than to gather clinical data to submit products to
the FDA for approval. Our real focus and one of the key reasons that Myraqa was so important to us is that we need to
begin to run a very significant number of products through the regulatory cycles, inside the company the clearance
cycles, at a pace that almost no other company has ever done frankly.
Particularly as we get into these PMAs, the FDA only approves two to three PMAs a year and we're going to try to
push a whole bunch of products through there in the next three years. So we need that resource to accelerate it and the
strategy is to get these through the FDA, get them approved, and then sell a bundled solution that includes the kit, the
software, the instrument, the analytics, the cloud, cloud support that's necessary to implement this, and in some cases,
data sharing. So in our view that's well beyond an arms dealer. It's selling a complete solution. What it's not doing,
again to be clear, is taking those products directly to physicians and running the product out of our own laboratories.
<Q - Doug A. Schenkel>: Okay. Thank you.
Operator
Your next question comes from the line of Derik de Bruin with Bank of America. Please proceed.
<Q - Derik de Bruin>: Hi. Good afternoon.
<A - Jay T. Flatley>: Hi, Derik.
<A - Marc A. Stapley>: Hi, Derik.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 9 of 17
<Q - Derik de Bruin>: So you said something interesting or several things interesting, but the one I found interesting
was you were talking about the move to do NGS standards in the clinic and your involvement in that. Could you talk a
little bit about that? I'm just curious. Is this standards for everybody's platform in terms of what you need for NGS, or is
this more focused on Illumina? I'm just curious, what were the representation from the other sequencing firms, and how
does the regulatory and the standard environment sort of flesh out?
<A - Jay T. Flatley>: Yes. This was a consortium we put together under Rick's vision and creation. It consisted of a
handful of working groups that included large cancer centers, some academic representation, some peripheral
participation from the FDA, although they were not actually part of the committees themselves, and Illumina. So there
were not other sequencing vendors as part of this. But what our goal was to do here was to set standards that these
committees believed would meet the needs of the clinical community. So this wasn't -- the committees themselves were
not driven by Illumina. We didn't chair any of the committees.
But the focus was all around some of the seminal questions that our customers have about, how do you prepare the
sample, what sample input volumes do you need, how do you handle FFPE, what's the concentration, how deep do you
need to sequence, how do you analyze and report out the data, what do you do with incidental findings. And so each of
these committees have now completed their work in what we called phase one, and we plan to publish this information,
so it's going to be available to anybody. So any other sequencing vendor could use these same standards to deliver
products into the community. But we thought getting those done, and getting them done quickly, which we have
accomplished I think in a very short period of time, was critically important to move the market forward.
<Q - Derik de Bruin>: Great. Thanks for the clarification on that. And just one question, so can we talk arrays for a
moment? And just give us a little bit of flavor in terms of how your array business is fragmented, so it might give us
some idea in terms of what's cyto, what's ag-bio, bio banking, what's genotyping. Just so we're getting a sense, because
if you're taking about growth of bio banking, ag-bio, and some of these other ones in the future, DTC stuff. I just sort of
want to get a flavor of how to better model it [ph] indiscernible (35:09) standpoint.
<A - Jay T. Flatley>: Yes, I mean we don't publicly break down all the subcategories in the array business. But
Infinium is clearly a big part of our array business. More and more is going toward customized chips within the
Infinium product line, so our more focused array products. As a result of that, we now have a whole group that's really
focused totally on creation of custom products, both sequencing and arrays because of that trend.
Ag continues to be a good market. It's growing probably mid-single digits, I'd say in the ag market. Most of that market
is now arrays, and not as much sequencing. Back a couple years ago sequencing was the new thing there, because you
had to sequence a bunch of these organisms initially to be able to develop the array products. But today it's more of an
array-based market. IVF I think is coming on strong there. It's a very young market and one that has a tremendous
amount of upside opportunity, although part of that will go to sequencing as well over time.
The parts of our market that were a bit weak, as we mentioned, were in some segments of consumer. We have a couple
of consumer customers that are doing extremely well, but we had one customer in particular that had lower volumes in
the quarter. And, as I mentioned, in terms of year-over-year comparables, we had a large project that wrapped up. And
that's helped, or that caused the Infinium volume to drop somewhat.
<Q - Derik de Bruin>: Thank you. And just as far as a quick follow-up, how many more of the bio banking deals are
out there in terms of just the size of the opportunity and where are things in sort of the negotiation? I know there have
been some announcements. And then I'm just curious in terms of globally what are people doing with it, and are people
going to move more towards sequencing when they're doing the bio bank characterization?
<A - Jay T. Flatley>: Yes. I'd say that probably over the next few years a handful of bio bank projects is probably the
right way to think about it. Our expectation is that those would not move to sequencing any time soon, and the reason is
that typically, almost by definition, a bio bank project is a very large number of samples and so you need extremely low
price per sample. I mean these projects tend to be in the $50 to $100 per sample range. And so sequencing is probably
not the technology that's going to address that market segment.
<Q - Derik de Bruin>: Okay. Thank you very much.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 10 of 17
Operator
Your next question comes from the line of Dan Arias with Citigroup. Please proceed.
<Q - Dan Anthony Arias>: Afternoon, guys. Thanks. Jay on the X Ten, just given the way that demand and
manufacturing capabilities are tracking at this point, are production and capacity something that you think will be a
factor next year? Or do you think that at that point you kind of are able to manage through the types of shipment
numbers that your pipeline sort of implies here?
<A - Jay T. Flatley>: I think our capacity is going to be fine at this point. We're still a bit in the catch-up mode to the
backlog because you know we booked so many right out of the chute in the first sort of quarter-and-a-half that this
product was in the marketplace. And as we discuss with all of our new product launches, you can't build capacity to
instantly drive down that backlog or else when you get to the more steady state your capacity's too high. So we have to
keep the capacity a bit higher than the incoming order rate to begin to drive down the backlog. I suspect by the end of
this year, we'll be sort of at a steady state rate on HiSeq X Tens in terms of a match of incoming order rate to
production volumes.
<Q - Dan Anthony Arias>: Yes. Okay. That's great. And then maybe just one on the clinical markets, I guess how are
you thinking about RNA-Seq and the ability to sort of move in on qPCR for gene expression assays?
<A - Jay T. Flatley>: RNA-Seq continues to be one of our most important applications. In fact it's one of the core uses
of NextSeq. It's a fantastic instrument for doing RNA-Seq. Some of the new sample prep products that we've launched
are targeted expressly at that market. And so I do think we're going to continue to eat away at PCR-type applications
for doing expression, and RNA-Seq is the perfect platform to do it. And as the price of the sample prep kits continue to
come down. I think it becomes more and more competitive with PCR.
<Q - Dan Anthony Arias>: Thanks a lot.
Operator
Your next question comes from the line of Ross Muken with ISI Group. Please proceed.
<Q - Ross J. Muken>: Good afternoon, guys, and congrats.
<A - Jay T. Flatley>: Thanks, Ross.
<A - Marc A. Stapley>: Thanks, Ross.
<Q - Ross J. Muken>: So on the X Ten customer base, if we think about like the evolution of the conversations you
guys are having, I'm assuming there's some interesting incoming requests to discuss with you project ideas, or the like.
How has the type of customer, or the mix, or geographic changed? I'm just curious in a sense where like you see one
country pursuing a massive endeavor of looking at hundreds of thousands, or eventually multiples of that of samples.
Do you see other countries in a region where budgets are also at similar levels to what we would like to discuss
something else? I'm just trying to get the sense for the network effect and where it's had the most surprising shift and
where not maybe.
<A - Jay T. Flatley>: Let me see. Let me throw an answer out there, and you can tell if I've successfully answered
your question, because I'm not 100% sure of what you're asking here. But I guess in terms of the profile of customers
so far in X Ten, we've probably been surprised by the overall interest in Asia. That's an area that's way surpassed our
expectations. I would say what's happened in Europe is about what we expected, and there's some good continued
prospects in Europe that we think will wind up being Q3 or Q4-type opportunities.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 11 of 17
In terms of a network effect, I guess we haven't seen, maybe other than a couple of examples, customers feeling like
they had to buy one because their competitor bought one. We've seen maybe a few examples like that. There probably
have been more purchases outside of customers who have years of experience in sequencing than we may have
thought. Our profile going in was that probably two-thirds to maybe three-quarters of the customers would be those
types who already knew how to sequence, and just wanted to up their production levels and reduce their cost. And
we're probably more like 50/50 or maybe even less than that.
And so we have a lot of new customers to sequencing using these platforms, which actually is requiring us to
emphasize software more and put together some more integrated software capabilities around the X Ten for those sets
of customers. Any other observations? Marc, do you have any other observations on X Ten customer types that?
<A - Marc A. Stapley>: No, other than I think just punctuating the point you just made around the difference in mix
than what we originally expected. I mean the diversity of customers that we have that are buying X Tens is significant.
I mean you can there's at least one of every type of customer we might have expected and some that we didn't who
are buying the system or are interested in it.
<A - Jay T. Flatley>: Yes and I say that, you know if you get back to the population sequencing part of your question,
there's only a couple of these that we'd really put in the population sequencing category so far.
<A - Marc A. Stapley>: Yes.
<Q - Ross J. Muken>: So as usual, Jay, you were exactly on point with my confusing question so thank you again and
congrats.
<A - Jay T. Flatley>: Thanks.
Operator
Your next question comes from the line of Amanda Murphy with William Blair. Please proceed.
<Q - Amanda L. Murphy>: Hi. Good afternoon. I just had a couple questions on the HiSeq. I guess the first, I don't
think you mentioned the kind of where you sat in terms of the consumable range this quarter. And then just in terms of
the puts and takes there, obviously you've got the upgrade and then sample prep and then just curious how the HiSeq
utilization is trending with the few customers who also have an X Ten now.
<A - Jay T. Flatley>: Yes. Marc, you want to take that?
<A - Marc A. Stapley>: Yes. So on the range, what I did say in the prepared remarks was that the HiSeq utilization
was within our range of $300,000 to $350,000.
<Q - Amanda L. Murphy>: Okay.
<A - Marc A. Stapley>: A while back we stopped giving a precise number because you do see a fluctuation quarter
after quarter depending on a lot of factors including customer buying patterns, large orders placed beginning, end of the
quarter, that kind of thing. So yes, it was within our range and there was nothing unusual to call out there and we
continue to model that kind of utilization going forward. And even if you think about those customers that have bought
an X Ten, in fact, Jay mentioned some of those customers have even purchased HiSeq 2500 to fuel their non-whole
genome sequencing demand. That hasn't changed. The X Ten I mean has not changed our expectations on the HiSeq
range at all. So, that $300,000 to $350,000 is still very applicable.
<A - Jay T. Flatley>: Yes. I think that average, that's exactly right. We do have probably a couple of customers who
bought X Tens that may be using their HiSeqs a little bit less, so in those specific customer sites the revenue from
consumables, some of it shifted to X Tens off the HiSeqs. But on the average it's not having a measurable effect on the
overall consumable number.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 12 of 17
<A - Marc A. Stapley>: Yes. And on sample prep, just to that one specifically, obviously NeoPrep as Jay mentioned
earlier is a really important product for us in that area, and that's something that we would hope to fuel sample prep
gains going forward as well.
<Q - Amanda L. Murphy>: And then just in terms of the upgrades, you said that a third who could upgrade have. Is
that specifically to the customers that have an upgradable HiSeq, meaning the software upgrade? And then just curious
what you're seeing in terms of the installed base that can't, you know doesn't have access to the terabase. Have you seen
them actually pursue any kind of upgrade cycle at this point in terms of new instrumentation?
<A - Jay T. Flatley>: Yes. The one-third statistic was of the eligible instruments, and that's probably about in the range
that we would've expected. We think it will continue to go up here over the next couple of quarters. And in the
prepared remarks I mentioned a bit about what we're seeing on upgrades, that we think we are beginning to see those
older customers begin to upgrade and we think the pace of that will probably continue, and if anything probably
accelerate a bit into 2015. And we think that overall upgrade cycle could last a couple years.
<Q - Amanda L. Murphy>: And you still think then the quarter I think you said a quarter to a third of the kind of
installed base that can't upgrade may at some point. Is that still what you're thinking?
<A - Jay T. Flatley>: Well, we've never given a number. I think there's some analyst estimates out there, but we've
never given a number on the fraction that are eligible.
<Q - Amanda L. Murphy>: Got it. Okay. Thanks very much.
Operator
Your next question comes from the line.
<A - Rebecca Chambers>: Operator?
Operator
Your next question comes from the line of Dan Leonard of Leerink. Please proceed.
<Q - Dan L. Leonard>: Thanks. For my first question, I was hoping maybe you can give more color on the magnitude
of the sequential growth in NextSeq. It seems like a lot of the conversation is focused on X Ten.
<A - Jay T. Flatley>: Yes, sure, yes. I mean we were really pleased with what's happening with NextSeq. I mean we've
generated a lot of market demand. We're just now beginning to come up on cycles where people will start having
submitted grants, and grants will start coming out of the pipeline. So if you think about it, most of the units we've sold
to date would have been through people who didn't have to go through a grant process. And so there's just probably a
little bit of pent up potential energy in the pipeline right now.
You know as we said in the prepared remarks, half of those systems are coming from commercial type customers as
well. So it's a product that's really appealing in market segments that, like oncology, that really is a different segment
than the MiSeq. And early on, as we have talked about, we were a little concerned about the cannibalization that
NextSeq would have, and we haven't seen that. It's a lot of brand new customers to sequencing technology and a lot of
commercial usage of the system.
So we're very optimistic about beginning to convert the pipeline and continuing to grow it. And the product, I have to
say, is working exceptionally well in the field. I mean this is by far the highest quality product we've ever produced.
And the solid state nature of the way this is designed and manufactured I think is really paying off in terms of lower
warranty costs and really high CBFs in customer hands as well as great sequencing performance.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 13 of 17
<Q - Dan L. Leonard>: Got it. And then for my follow up, Jay, I wonder if I'm missing something on the consumable
line. The sequential growth in consumables was the lowest it's been in five years. And I know you said the consumer
customer for arrays was down sequentially, but I think that was the only sequential delta. I think your genotyping
comment was a year-over-year comment. So I'm curious what the plug is and I wonder if it's just that the distribution of
all of the utilization of these sequencers you're installing might be a bit more bimodal than it has been in the past, if you
could address that.
<A - Jay T. Flatley>: No. It's really the difference between sequencing and arrays here. So the sequencing
year-over-year consumable growth was very strong; arrays was not, and that's really the bottom line. And so the
average of those two is what gave us the overall number that we quoted as being lower than what you've seen in the
past.
<Q - Dan L. Leonard>: Okay. Thank you.
Operator
Your next question comes from the line of Isaac Ro of Goldman Sachs. Please proceed.
<Q - Isaac Ro>: Good afternoon, guys. Thanks. Just want to ask a question about the comment you made earlier, 70%
of system orders are from new customers. Maybe wondering if you can give us some color.
<A - Jay T. Flatley>: For MiSeq.
<Q - Isaac Ro>: Yes, okay, I'm sorry. Well maybe at a broader level, just for the new system orders you're getting
I'm sorry the orders you're getting from new customers, can you give us a sense of the mix for the various
instrumentation platforms and maybe how that compares to your current installed base?
<A - Jay T. Flatley>: By mix, do you mean mix of new versus existing?
<Q - Isaac Ro>: Well, I'm just curious.
<A - Marc A. Stapley>: Application?
<Q - Isaac Ro>: Like your, of your various instrumentation platforms, what the mix looks like for the new customers.
Are they preferentially buying more MiSeq versus NextSeq versus HiSeq? That kind of granularity as we think about
the future run rate on the pull-through those boxes will generate.
<A - Jay T. Flatley>: Yes. So we need to be a bit careful about how we use new here to make sure that we're all in
sync. So when we said for example, 70% of MiSeq orders are from new customers, those are customers that are new to
MiSeq, so they've never had a MiSeq before. They could already have a HiSeq. So I think given that, breaking it down
the way you asked isn't probably logical, or it doesn't make a lot of sense, if you see what I mean.
<Q - Isaac Ro>: Sure, okay. Maybe just another way to look at it would be if you could give us a sense of, in the
aggregate, as you look at your funnel for sales going forward, can you give us a sense of how many of the potential
orders you think you're going to get could be from totally new NGS customers?
<A - Jay T. Flatley>: Yes. So I would say we're probably looking in any given quarter, depending upon which quarter
it is, somewhere between 10% and 20% of our customers are brand new to NGS.
<Q - Isaac Ro>: Got it. Okay. And last one if I could just sneak it in would be, Marc for you on the tax rate side, it
looks like the guidance there was a little bit lower. And I'm wondering if maybe if there's anything specific there that's
driving it and what your priorities are around tax rate. Certainly tax rate is a topical issue across the market these days.
Thank you.
<A - Marc A. Stapley>: Yes, I think nothing's really changed around our strategy for the tax rate in particular. We've
been moving consumable manufacturing to Singapore. Arrays is largely there. We did a little bit of a change in
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 14 of 17
bringing the HiSeq X consumable back to, or into San Diego initially but we did put an instrument, NextSeq, in
Singapore. So no real change there in our manufacturing location strategy. The tax rate drop that you've seen is largely
other factors, I would say, including things like compensation expense and so on, that are higher than we expected. So
that's really I think the key there.
In terms of other strategies and what's fashionable right now and things like the inversion activities going on, that's
something that the way we think about that is that that would be a secondary benefit if anything to a more strategic play
we would make. And that's a completely different question. We'd have to look for the business strategy fit before
anything else, and if the tax benefit was there, that would be great. But as we've said before, those kinds of the large
opportunities, we don't see many of those existing out there.
<Q - Isaac Ro>: Got it. Thanks, guys.
Operator
Your next question comes from the line of Jon Groberg with Macquarie. Please proceed.
<Q - Jon Groberg>: Thanks. Just two quick questions from me. I guess first Jay, I think you gave a number of $90
million in the quarter for sales going to I think, I'm not sure exactly how you'd define it, cancer customers. So just
wanted to get a little bit more of a sense of what you were including in that.
<A - Jay T. Flatley>: That's all oncology, so it's research, translational and clinical. And the reason we do it that way,
Jon, is we've tried to break it down other ways, but so many of our customers are in these hybrid situations where
sometimes they're doing research and sometimes they're doing more translational or clinical work, typically on HiSeqs.
And so it's very difficult for us to get a clear breakdown of who's in which bucket.
<Q - Jon Groberg>: Okay. And then just out of curiosity for my second question here. Did you give a, did I miss it,
did you give a growth rate on kind of how that, what that grew on a year-over-year basis, cancer?
<A - Jay T. Flatley>: We didn't give a growth rate for that. I'm sorry. We gave a shipments growth rate of 30%. That's
right, shipments we did, 30%.
<Q - Jon Groberg>: 30%, okay. Thanks. And then just I guess my second question, Jay, if you strategically, as you
think about sequencing and arrays, obviously your focus has been much more on sequencing. It's been a higher growth
business, more investment there. One of your bigger competitors is actually starting to show some signs of life after
being dead for quite a while on that side. I mean, has your willingness to compete on that side of the business changed
at all? And has your view of how quickly some of those applications could move to sequencing, has that changed at all?
I'm just curious kind of strategically how you're thinking about your businesses there. Thanks.
<A - Jay T. Flatley>: Yes. Well, I would say in the past few years, our R&D investments have been biased more
towards sequencing, and we plan to remain extremely competitive in the array market. And if anything, you might see
us shift a little bit more investment back toward arrays, both commercially and in R&D. It continues to be a very big
business for us with great gross margins. And so we continue to look on it as being very complementary to sequencing.
Many applications we think will continue to move over to sequencing, but those tend to be much more on the
expression side than on the genotyping side.
The genotyping array market today is pretty much a low cost per sample market. And whether you're in ag or whether
you're in consumer, you're talking about per sample costs in the $50 to $150 range. And so it's going to be a while
before sequencing becomes applicable to those markets. But expression is quite different because the quality of the data
you get from sequencing is so vastly enriched from what you get from an array, an expression. And so those are
applications that we're continuing to move over from arrays to sequencing.
<Q - Jon Groberg>: Okay. Thanks.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 15 of 17
Operator
Your next question comes from the line of Bill Quirk with Piper Jaffray. Please proceed.
<Q - Bill R. Quirk>: Great. Thanks. Good afternoon everybody. First off, Jay, can you comment about the recently
increasing rhetoric from the FDA as well as a couple of senators around LDTs and obviously the potential for increased
regulation here? Now I'm guessing that this may be part of the move to expand the regulatory team, but certainly would
love your thoughts here given that this market is obviously becoming pretty important to Illumina and certainly would
expect it to become more so in the coming years.
<A - Jay T. Flatley>: Yes. It seems like at least from what I've read that most of the rhetoric is coming from around
the FDA, not from the FDA themselves here, and there are various camps that are asking for more progress on this
issue. As you know, the question of how LDTs are going to be regulated has been out there for several years at least.
And so we don't have a particular crystal ball on this other than to reiterate the position that we've taken before, where
we've said we think it's unlikely that there will be global requirements for all LDTs to become FDA approved. And
that's driven by the sheer number of tests. I mean, even if those were all submitted, the FDA would take years and years
and years to be able to analyze and approve those tests, and the fact that so many of them are critically important to the
healthcare system.
And so we do think that if regulation of LDTs does come down, it would more likely be targeted for very high-risk
tests or some subset of tests. It could also potentially require future tests to be regulated, but grandfathering in existing
tests. So those are some of the options that are on the table, and we don't know where the FDA is going to wind up on
it. But clearly we're prepared to do whatever's necessary here, and we have, particularly now with our acquisition and
Mya joining us, the regulatory horsepower to put things through the FDA we think in a way and at a rate that most
others don't, particularly around sequencing technology.
<Q - Bill R. Quirk>: Got it. Thank you.
Operator
Your next question comes from the line of Zarak Khurshid with Wedbush Securities. Please proceed.
<Q - Zarak Khurshid>: Thanks. Good afternoon, everybody. Thanks for taking the questions. Jay, first a question on
the research side of the business, how much of the NIH budget do you think you account for today? And where do you
think that's going over time?
<A - Jay T. Flatley>: Well, as a percentage of the total, we're still very small from the overall budget. If you looked at
a breakdown of it, a massive amount of it goes to bricks and mortar and labor. And the amount that goes to extramural
grants, and then the fraction of those extramural grants that come to sequencing is still a very small percentage.
<Q - Zarak Khurshid>: Got it, okay. And then just as a follow-up on NIPT which we love so much. How will you
think about the pricing in the average risk setting in China? Just thinking about the margins for those 3,000 labs, I know
that the pricing environment is kind of tricky there. How do you think about the economics for those customers?
Thanks.
<A - Jay T. Flatley>: Yes. Clearly the pricing is going to be lower in China to begin with, and then lower yet for
average risk. It's probably likely in China that there will not be as much bifurcation of testing as you're beginning to see
in the U.S. where there's tests for higher risk patients being at a higher price point, and being a test that's got a higher
quality standard perhaps than an average risk test does. So I think in the U.S., you're going to see some bifurcation,
perhaps in Europe as well. In China it's likely to be one standardized test. The price points will be lower than what we
see anywhere else in the globe, probably in the range of $300. Even at that, we think on the NextSeq platform our
margins are going to be just fine.
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 16 of 17
Operator
Your next question comes from the line of Peter Lawson of Mizuho Securities. Please proceed.
<Q - Peter R. Lawson>: Jay, I wonder if you could just talk us through the NGS diagnostic pipeline, and what
timelines you have for FDA submission on new tests? It sounds like there is a lot coming. Thank you.
<A - Jay T. Flatley>: Yes. So in NIPT in particular, we've talked about the fact that we're submitting our verified tests
to the FDA, and we remain on track to have that submission before year-end. We have a whole series of other projects,
some around companion diagnostics. We've announced one with Amgen that we're working on to submit through the
FDA the result of our work. The onco panels and the actual genome program will result in products that will need to go
through the FDA as well. And we're in discussions with quite a number of sequencing partners who want to put their
technology through the FDA in partnership with us. And so you start adding all that up, it's a lot of work, and it
requires a bigger team than the team we had, and hence the acquisition and investments we're making in regulatory.
<Q - Peter R. Lawson>: And then just on the array business, what parts of that do you think exist in three years' time?
<A - Jay T. Flatley>: I think the consumer part will certainly exist. The ag part will continue to exist. I suspect that
what we traditionally think of as whole genome association will likely not exist in three years. So that part will be gone.
I think most of the expression part of the array business will have moved to sequencing in that timeframe. I think some
of the prenatal and IVF applications will move away from arrays to sequencing as well, fundamentally better
technology. So, but it's the low-cost high-volume markets that will continue to stay on arrays, ag, consumer probably
being the two standouts.
<A - Rebecca Chambers>: Operator, we're ready for our last question.
Operator
Your next question comes from the line of Bryan Brokmeier, Maxim Group. Please proceed.
<Q - Bryan P. Brokmeier>: Hi. Thanks for squeezing me in. Beyond NIPT, how does the clinical market adoption of
NGS in Europe, China and other regions compare to that of the United States?
<A - Jay T. Flatley>: I'd say it's probably fastest in the U.S. outside of NIPT. The Chinese market will come along
quite quickly in other areas as well, particularly in oncology. So we're beginning to work very directly in that
marketplace with some of the thought leaders around oncology. I do think markets like Japan will begin to come on
quickly as more oncology products come into the market, whereas there are laggards in some of the reproductive health
markets for structural reasons and societal reasons. I think Europe will come along generally slower than most,
although you can get CE Mark on these products perhaps earlier because of the way the lab systems work in Europe.
It's a much more distributed market, and therefore adoption in general tends to be somewhat slower.
<Q - Bryan P. Brokmeier>: Okay. Thanks. And then also, in terms of APAC, you've talked about, I mean you put up
extremely strong order growth this quarter and with the last few quarters, you've discussed it as really being driven by
the growth in Japan, haven't really talked too much about China. I was wondering if you could sort of share your
thoughts around what you're seeing in China and how that's if you saw any change late in the quarter from what you
saw in the last couple quarters?
<A - Jay T. Flatley>: Yes. We actually have seen somewhat of a change there. So our China business was actually
quite strong in the quarter. In fact, it led, sort of the over-performance in Asia was led by China this quarter. Japan was
actually somewhat soft, and we do generally see that in Q2 because Q1 is such a strong quarter. Because of the end of
the funding cycle in Japan, there's always a downturn in the second quarter. But this year in particular, there's
restructuring going on inside of Japan, and the creation of essentially the equivalent of an NIH there, which has caused
sort of a structural disruption in the funds flow that we think will last a couple of quarters. So our Japan business was a
bit softer. We think it'll probably be a little bit softer next quarter. But these are funds that are going to continue to flow
Company Name: Illumina Inc
Company Ticker: ILMN US
Date: 2014-07-23
Event Description: Q2 2014 Earnings Call
Market Cap: 23,194.18
Current PX: 180.64
YTD Change($): +70.05
YTD Change(%): +63.342
Bloomberg Estimates - EPS
Current Quarter: 0.526
Current Year: 2.171
Bloomberg Estimates - Sales
Current Quarter: 439.500
Current Year: 1757.810
Page 17 of 17
as we get into Q4 and Q1 next year. So in some ways, it's just pushed out some of the business in Japan temporarily.
<Q - Bryan P. Brokmeier>: Okay. Thanks a lot.
Operator
There are no further questions in queue.
Rebecca Chambers
Thank you, operator. As a reminder, a replay of this call will be available as a webcast in the Investor section of our
website, as well as through the dial-in 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 the third fiscal quarter.
Operator
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.
This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript
is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript
and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall
have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential,
special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the
information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities
or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP.
COPYRIGHT 2014, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is
expressly prohibited.