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NovaSeq, China Instrument Sales Help Illumina Get NGS Business Back on Track in Q4

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NEW YORK – Illumina's core next-generation sequencing business is set to grow again, thanks to strong sales of its high-throughput NovaSeq instruments and reagents and due to growing business in China.

"Our business accelerated in the second half of the year, growing 17 percent compared to the first half," Illumina President and CEO Francis deSouza told investors on a conference call on Thursday following the release of the firm's fourth quarter and full-year 2020 financial results. "By the fourth quarter of 2020, clinical sequencing run rates actually exceeded pre-pandemic levels and research run rates also returned to normalized pre-pandemic volumes – it was great to see how our customers successfully rebounded under these challenging circumstances."

Year-over-year revenues for Q4 were flat after they had been down over the previous two quarters, and the firm guided to high single-digit growth for Q1 2021.

On the call, deSouza and CFO Sam Samad attributed the rebound to a number of developments, especially NovaSeq's new v1.5 reagent kit, launched in August 2020, as well as clinical sequencing, especially in China.

"NovaSeq consumables had a record quarter, growing in the mid-teens year-over-year," deSouza said, adding that orders for NovaSeq instruments in the period were the highest since Illumina first launched the platform in 2017.

In China, Q4 revenues grew 3 percent year over year and 16 percent over Q3 2020 to $96 million, driven by the highest quarter for sequencing instrument revenue since 2017. And going forward, Illumina is expecting revenue growth in China "that exceeds our overall revenue growth as a company," Samad said.

"We're now starting to see sort of the next wave of adoption in the clinical market in China," deSouza added. "We're seeing more hospitals embrace sequencing in their own hospital labs."

"We are still in a pandemic year and we still have an expectation here that for the first six months of the year, that we are in a pandemic," Samad cautioned. "I would not call this a normal year, but in the second half we hope to be coming out of the pandemic."

But Wall Street analysts saw reason to adjust price targets upwards, though none changed their stock rating. JP Morgan raised its price target for shares of Illumina to $350 from $280; Cowen, to $460 from $385; Canaccord Genuity, to $410 from $350; and SVB Leerink, to $470 from $360.

"We are encouraged by signs of recovery in the base business and believe that bias is to the upside relative to management guidance," Cowen analyst Doug Schenkel wrote in a research note. SVB Leerink analyst Puneet Souda and Canaccord Genuity analyst Max Masucci both called the Q1 2021 guidance "conservative."

In Friday trading on the Nasdaq, shares of Illumina shot up 15 percent to $520.69.

For full-year 2020, the firm's revenues were down 9 percent, driven by a 6 percent decline in research and applied sequencing consumables sales due to the pandemic.

Going back to the beginning of the pandemic, deSouza had said that Illumina's technology would be important to virus surveillance, an issue made more pressing by the recent emergence and spread of troubling variants, such as the new strains identified in the UK, South Africa, and Brazil.

While surveillance efforts are accelerating in several countries, they have not been material to Illumina's revenues and are not expected to be for some time. "We have not really assumed a significant impact of [COVID-19 variant surveillance] in our guides," Samad said during the Q&A part of the call. "We are seeing definitely strength from that, but again, a bit early to really size that for the full year."

But it could eventually be significant for Illumina, which is actively involved in variants sequencing efforts, especially in the UK and the US. "If done right," COVID-19 surveillance could be "bigger than what we have today for the flu," deSouza said.

The COVID-19 pandemic did have a catalyzing effect on instrument sales to hospitals in China, which are "starting to embrace sequencing and sort of bringing it into their labs," deSouza said. "That's sort of a wave that started to grow last year and [is] certainly sort of picking up as we entered this year."

He noted that demand was partially driven by approval for the NextSeq Dx by China's National Medical Products Administration. "We expect this approval to drive NextSeq Dx placements and further increase our clinical presence in 2021," he said.

NovaSeq

Samad also noted that several customers in emerging markets placed their first NovaSeq orders. These were among a cohort of first-time high-throughput customers that drove NovaSeq sales in Q4 — momentum that Illumina expects to carry forward.

"The NovaSeq v1.5 reagent introduction is catalyzing a new wave of high-throughput customers," deSouza said. "In fact, over half of our NovaSeq system orders in 2020 were to new high-throughput customers."

The reagents lower sequencing costs to as little as $600 for a whole human genome, offer improved quality, longer shelf life, and full support for unique molecular identifiers.

They are accelerating purchasing timelines and prompting legacy HiSeq customers to upgrade, deSouza said. "If you look at the pricing now, all it takes for a HiSeq 2500 customer is for them to run about four high-output kits a month, and they can justify the list price of a NovaSeq in a year," he said.

He noted that 320 customers have yet to upgrade to NovaSeq from HiSeq.

NovaSeq consumable pull-through rate in Q4 was $1.2 million per instrument per year, the highest level of the year. Illumina expects that to continue with pull-through rates of $1.1 million to $1.2 million per instrument in 2021.

NovaSeq's throughput helped a service provider consortium using Illumina technology win a competitive bid for K-DNA, a large-scale project in South Korea that aims to sequence 7,500 genomes by the end of 2021 in its first phase and 1 million genomes by 2030, deSouza said.

Other highlights for 2020 included year-over-year growth in oncology testing, he said, which accounts for approximately 20 percent of total sequencing consumables, while reproductive health represented about 12 percent of sequencing consumables, with revenue for the VeriSeq noninvasive prenatal testing solution growing over 20 percent in 2020.

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