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Illumina Lowers 2022 Guidance, Braces for Fines from European Commission

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NEW YORK – Illumina said after the close of the market on Thursday that it is lowering its 2022 guidance for revenue and earnings per share.

The firm now expects consolidated revenue growth — the combination of core and Grail revenues — in the range of 4 percent to 5 percent for 2022 and adjusted EPS in the range of $2.75 to $2.90. Previously, it had estimated consolidated revenue growth in the range of 14 percent to 16 percent and adjusted EPS between $4.00 and $4.20. Due to potential legal expenses, it now also expects a net loss of $2.93 to $2.78 per share for 2022.

Core revenue growth is now estimated to be in the range of 3.5 percent to 4.5 percent — including instrument revenue growth of 1.5 percent and consumables revenue growth of 5 percent — while the firm anticipates revenues from liquid biopsy firm Grail to be in the range of $50 million to $70 million. Previously, it had expected core revenues to grow 13 percent to 15 percent, with Grail revenue in the range of $70 million to $90 million. 

Illumina is also preparing for the eventuality that the European Commission will fine it 10 percent of its 2021 revenues for proceeding to acquire Grail despite an ongoing competition probe. The firm continues to operate Grail independently under a hold-separate agreement.

During the quarter, the firm recognized $609 million in legal contingencies, including $453 million for a potential fine from the European Commission and approximately $156 million related to the firm's recent settlement with BGI.

These actions led Illumina to post a net loss in the quarter of $535 million, or a $3.40 loss per share, compared to net income of $185 million, or $1.26 per share, in the year-ago period.

On an adjusted basis, EPS was $.57, compared to $1.87 in the year-ago quarter, missing the consensus Wall Street estimate of net income of $.65 per share.

Illumina's misses were "significant," JP Morgan Analyst Julia Qin wrote in a note to investors, calling the cut to guidance "massive." Canaccord Genuity Analyst Kyle Mikson noted that the results were "modestly below our estimates" and said shares were "attractive at current levels."

The firm's Q2 results were negatively impacted by macroeconomic headwinds, including supply chain issues, slowing COVID-19 surveillance, adverse foreign exchange effects, and COVID-19 shutdowns in China, CEO Francis deSouza said on a conference call following the release of the firm's second quarter financial results. Overall, Illumina reported year-over-year revenue growth of 3 percent for Q2.

"Each of these were slightly worse than we expected," Chief Strategy and Corporate Development Officer and interim CFO Joydeep Goswami added.

Certain "genomics-focused" customers delayed plans to open new labs due to general supply chain pressures, deSouza said, while others are holding onto less consumables inventory. Supply chain issues "on our end" delayed delivery of certain NextSeq instruments until the third quarter, Goswami added.

"The issues cited are deemed temporary, with no impact from competitive pressure of a material change in underlying growth, though we [and] investors will want evidence in future results to verify management's assertions," Cowen Analyst Dan Brennan wrote in a note to investors. "Other genomic players (with different issues) have seen worse reductions in '22 forecasts (10x Genomics, PacBio) only to see stocks rally as expectations were reset to ideally beatable levels."

Still, sequencing activity during the quarter was "robust," deSouza said, and bright spots included the NovaSeq and NextSeq 1000 and 2000 instrument lines. NovaSeq shipments, representing the high-throughput sequencing market, grew 23 percent year over year, while NextSeq 1000 and 2000 shipments grew 20 percent, although the mid-throughput segment saw a 14 percent decline driven by lower NextSeq 550 shipments.

For the three months ended June 30, the San Diego-based sequencing and microarray technology company recorded total revenues of $1.16 billion, compared to $1.13 billion a year ago, missing the consensus Wall Street estimate of $1.22 billion. On a constant currency basis, revenues were up 5 percent, Illumina said.

Nearly all revenues came from the core Illumina business; Grail, Illumina's cancer liquid biopsy subsidiary, recorded revenues of $12 million from Galleri test fees.

Illumina reported $1.01 billion in product revenue, up 3 percent from $972 million in Q2 2021, and $156 million in service and other revenue, up 1 percent from $154 million a year ago.

Sequencing systems revenues grew 1 percent to $190 million compared to $189 million in Q2 2021, driven by NovaSeq sales. Sequencing consumables revenues were $744 million, up 6 percent from $704 million a year ago, driven by 20 percent growth in oncology testing but partially offset by headwinds from China's lockdowns, reductions in COVID surveillance, and foreign exchange effects. Microarray instrument revenues were approximately $3 million, down from $5 million a year ago, while microarray consumables revenues were $74 million, flat from the prior year. Sequencing service and other revenue fell 6 percent year over year to $145 million from $154 million.

Revenues from the Americas were $633 million, up 7 percent from $589 million in the prior-year period; revenues from China were $118 million, down 11 percent from $132 million; revenues from Europe, the Middle East, and Africa were $308 million, down 4 percent from $320 million; and revenues from Asia Pacific and Japan were $97 million, up 14 percent from $85 million.

COVID-19 surveillance contributed $25 million in consumables revenues and $2 million in instrument revenues, down 55 percent year over year, driven by lower-than-expected testing volumes.

Illumina said it is planning to launch a new virus surveillance assay, a targeted sequencing assay for 66 of the "most critical viruses" including monkeypox and polio virus, deSouza said, which should be commercially available later this year.

Illumina's core R&D expenses grew 23 percent to $249 million in Q2 from $202 million a year ago, while its core SG&A expenses fell 18 percent to $339 million from $413 million a year ago.

Grail R&D expenses were $86 million while SG&A expenses were $72 million, lower than expected due to cost management, Goswami said.

The company finished the quarter with $1.29 billion in cash and cash equivalents and $38 million in short-term investments.

Work on the NovaSeq Dx instrument is "progressing as planned" deSouza said, and it is on track for a Q4 launch. Similarly, the Infinity long-read product is on track for an early-access release later this year.

And Illumina has "made fantastic progress over the last quarter" on Chemistry X, its next-generation sequencing-by-synthesis chemistry, which it plans to provide more details about at the Illumina Genomics Forum in late September.

In Friday morning trading on the Nasdaq, Illumina's shares were down 8 percent to $209.80.