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Illumina Sequencing Instrument Sales, COVID-19 Surveillance Continue to Boost Business

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NEW YORK – Illumina officials were pleasantly surprised by strong instrument sales in the second quarter, some of which are intended for COVID-19 surveillance.

Instrument sales more than doubled year over year, to $189 million, and clinical sequencing helped the San Diego-based sequencing technology firm post record sequencing revenues of over $1 billion.

"We started the quarter fast and it got faster," Illumina CEO Francis deSouza said on a conference call on Thursday following the release of the financial results.

Illumina saw year-over-year growth in every category of its NGS instrument lineup, from benchtop sequencers to its high-throughput workhorse, NovaSeq, he said, and instruments for COVID-19 surveillance provided an unexpected $20 million bump.

After selling approximately $35 million worth of instruments for pandemic surveillance in Q1, deSouza said the company thought it was done. "Then, lo and behold, we sold some instruments for surveillance in Q2," he said. "It's possible people buy more, but that's hard to predict."

Wall Street analysts gave Illumina the thumbs up on the results. Even with pressure on the firm from US and European regulators concerning its plans to buy Grail, analysts said the outlook for the company was positive.

"Even relative to high expectations, this was a good update," Cowen analyst Doug Schenkel wrote in a note to investors. He raised the price target for shares of Illumina to $550 per share.

"We see multiple growth drivers for Illumina through the end of the year, including: continued pickup in oncology and diagnostic testing, ongoing COVID surveillance, [and] record instrument placements driving high consumables growth," SVB Leerink analyst Puneet Souda wrote.

JP Morgan analyst Tycho Peterson was more subdued, noting that even after raising guidance for 2021, "the implied sequentially flat [second half 2021] outlook … leaves more to be desired." He set a December 2022 price target of $425 per share.

Illumina's pandemic surveillance-driven instrument sales were indicative of momentum carried through from Q1. After dropping sequencing activity during 2020 due to lab closures, the firm's customers are back to business and buying instruments at all price points.

Revenues from benchtop instruments were up 50 percent year over year, deSouza said, adding that the company shipped "more MiSeq instruments this quarter than any other quarter in the last five years."

"This record demand has been driven by our core business as well as emerging areas like preimplantation genetic screening and COVID surveillance," he said.

"The MiSeq is a compelling choice for COVID surveillance labs running fewer samples, particularly with the launch of the 96-Sample COVIDSeq Assay," an Illumina spokesperson said in an email.

The mid-throughput instruments are also selling well. "It's quite dramatic, actually," deSouza said. "If you look at the number of mid-throughput instruments we shipped over the last few years, it's been fairly steady. This year, we are on track to almost double that number."

The firm's newer NextSeq 1000 and 2000 models have "dramatically expanded the mid-throughput market," he said. "There wasn't just an upgrade or a replacement cycle … there are lots of people who are still buying 550s and the 550Dxs. What has happened is, we've catalyzed and opened up new markets for the mid-throughput instrument with the price points that we've put out with the 1000, 2000."

Clinical customers are driving sales of NextSeq 550 instruments, with record shipments for NextSeq 550Dx "as we see a trend toward decentralization of clinical sequencing outside the US," deSouza said.

"There are people who validated workflows on those instruments, they are continuing to buy," he noted, with "a good number of" customers who are new to Illumina or new to mid-throughput sequencing.

Illumina CFO Sam Samad added that about 25 percent of NextSeq 1000 and 2000 customers are new to Illumina, while about 30 percent are moving from benchtop instruments. "We're also seeing capacity upgrades as well as NextSeq 550 conversions going to the 2000 and 1000," he said. The firm was not seeing customers choose the NextSeq 2000 instead of NovaSeq, though. "We always said we didn't expect that … we're seeing only a really, very, very small handful of customers having done that," he said.

Demand for high-throughput sequencers also grew, as NovaSeq shipments in the quarter more than doubled year over year. More than half of the orders in Q2 came from customers who are new to high-throughput sequencing, deSouza said. "Additionally, our customers are continuing to use [high-throughput] systems at a higher rate to meet demand in oncology testing, genetic disease testing, and population sequencing programs," he said.

The expanding clinical market, which continues to be the biggest growth driver for Illumina, was a big force behind instrument sales. Illumina did not disclose clinical sequencing consumables revenues, "but directionally we saw very strong growth in clinical consumables year over year," a spokesperson said.

In particular, deSouza highlighted the impact of reimbursement for oncology and noninvasive prenatal testing that was established over the last year, especially outside the US.

Illumina officials noted that the UK Biobank sequencing project would soon wrap up, resulting in a loss of approximately $30 million per quarter, but said that the All of Us program in the US is now sequencing at production scale.

Sequencing consumables for COVID-19 surveillance contributed about $40 million to Q2 revenues and could contribute between $50 million and $60 million per quarter for the foreseeable future, Illumina officials said.

Establishing infrastructure for global pathogen surveillance will also lead to more instrument sales, but potentially not until 2022. Samad noted that the US American Rescue Plan has already doled out $90 million out of $400 million for Centers of Excellence, but that most of those funds won't be allocated until August 2022.

But Illumina has plenty of instruments to sell until then. "We ended the quarter with the highest instrument backlog since launching NovaSeq," deSouza said.

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