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5 Intriguing Things Illumina's Management Said in Its Q3 Update

By Keith Speights - Oct 26, 2017 at 7:37AM

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A surprise product cancellation was just one of them.

"Let the good times roll" might be a good theme for Illumina (ILMN -2.21%) in 2017. The gene-sequencing pioneer reported its third-quarter results on Tuesday. Illumina once again beat expectations, posting strong revenue and earnings growth, as well as bumping up its full-year 2017 guidance.

The company's management team fielded questions from analysts in a conference call following the earnings announcement. Here are five intriguing things Illumina's executives said in the third-quarter update that investors will want to know. (Quotes courtesy of S&P Global Market Intelligence.) 

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Image source: Getty Images.

1. NovaSeq blowing past expectations

Pretty much everyone expected Illumina to score in a major way with the launch of its new NovaSeq system. However, success for the system is surprising even Illumina. 

Illumina CEO Francis deSouza said that the company is "on track to significantly exceed the 2017 forecast" for NovaSeq. Conversions to NovaSeq from existing customers using the HiSeq systems were anticipated. But Illumina is also seeing high interest from other customers. For example, around one-third of orders for NovaSeq in the third quarter were from organizations that had either not previously been Illumina customers or were users of the company's lower-throughput bench-top systems.

NovaSeq's momentum appears to be sustainable. The wave of upgrades from existing HiSeq customers to the new system is still only in the early stages. As a result, deSouza stated that Illumina expects "to continue to see strong NovaSeq uptick through the fourth quarter of 2017 into 2018 and beyond."

2. Surprisingly strong consumables revenue

Even before the launch of NovaSeq, Illumina executives had cautioned that consumables revenue could be "lumpy" as customers worked down consumables inventory for their existing systems before switching to NovaSeq. The company experienced a positive case of lumpiness in the third quarter.

According to deSouza, the $42 million increase in consumables revenue from the second quarter of 2017 to the third quarter represented "the largest ever sequential dollar increase in our sequencing consumable business." One big driver of that growth was NovaSeq. However, deSouza also said that Illumina saw record-high utilization of its bench-top NextSeq system. This utilization was another key factor fueling consumables revenue growth. Even HiSeq consumables revenue topped expectations, primarily because of a few large customers with higher volumes.

3. Changes in strategy

Illumina originally planned to offer two NovaSeq systems -- the NovaSeq 6000 and the NovaSeq 5000. The NovaSeq 6000 began shipping earlier this year, while the company anticipated a launch of the NovaSeq 5000 in early 2018. There has been a change in strategy, though.

Francis deSouza announced in the third-quarter conference call that Illumina won't roll out the NovaSeq 5000 after all. He cited customer feedback and experience selling the NovaSeq 6000 system as the key factors in the decision. According to deSouza, Illumina now believes that the 6000 system "fully meets all customer needs." That could be good news, since the NovaSeq 6000 has a list price of $985,000 compared to the planned $850,000 list price for the NovaSeq 5000.

4. Opportunities for winning biopharma customers

The FDA's approval of Novartis' Kymriah as the first CAR-T cell therapy was, in deSouza's words, "a very exciting development for the field of oncology, opening a whole new world of possibility for gene and cell therapies." And for Illumina, it represents a great opportunity for growth.

Sequencing is an important tool in immuno-oncology (I-O). Biopharmaceutical companies developing I-O drugs for treating cancer are increasingly interested in performing gene sequencing as part of their research efforts. When asked about the potential for more sales to biopharma companies, deSouza replied, "We see them as a growing part of our business, and I expect that will continue to be so for a long time." 

5. Possible future for consumer genomics

What about Illumina's consumer genomics spin-off, Helix? The new company only launched in July, so it's still too early for any significant financial impact for Illumina. However, Illumina enjoyed a very strong third quarter for microarray instrument revenue, driven partly by shipments to direct-to-consumer customers.

Those customers "believe that they are still in the very early stages of this big consumer genomics market," based on deSouza's discussions with them. He noted, though, that Illumina is also talking to direct-to-consumer customers about transitioning to sequencing. Although microarray revenue would decline, sequencing system sales -- and, more importantly, long-term consumables revenue -- would increase.

It's difficult to predict when the shift of direct-to-consumer customers from microarrays to sequencing might happen, but deSouza said that it would be "terrific news" for Illumina. He's right. This possibility is one more reason why Illumina could have plenty of more impressive quarters in the future -- like it just had.

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