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Illumina, Inc. (NASDAQ:ILMN)

UBS Global Healthcare Conference

May 20, 2013 11:30 am ET

Executives

Marc A. Stapley - Chief Financial Officer and Senior Vice President

Analysts

Daniel Arias - UBS Investment Bank, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Okay. Welcome again. I'm Dan Arias. I'm the life sciences analyst at UBS. I'm going to ahead and introduce our next company to present, Illumina. We're happy to have Marc Stapley, the CFO; and Rebecca Chambers from Investor Relations. So why don't I turn the podium over to Marc for some comments. And then immediately following the presentation, we'll have breakout Q&A across the hallway in [indiscernible].

Marc A. Stapley

Good morning. Thank you, Dan. We really appreciate your having us here again this year, the UBS Conference. So I'm going to spend maybe 20 minutes or so, 25 minutes, just giving a quick update on Illumina, our markets, our products and our business and some of the areas of focus for the company in the recent period.

So firstly, I'd like to reference our Safe Harbor statement on Slide 2. Just to remind everyone that we have the Safe Harbor, I may be making some forward-looking statements today. If you have any questions or concerns, I would ask you to look at our SEC filings, including our 10-K, 10-Q, et cetera.

So I'm sure many of you are familiar with Illumina. But for those of you who don't know the company, let me maybe spend just a couple of minutes giving you a quick update and a little bit of background on Illumina. As the tagline says here on the chart, we are the worldwide leader in genomic analysis.

2012, we had revenue of $1.15 billion, which was a growth rate of 9% year-over-year despite the very difficult economic environment. We have over 2,400 employees globally. We are truly a global company with locations all around the world, but our headquarters is in San Diego, California. As I mentioned, we are the recognized leader in next-gen sequencing, with over 90% of the world sequencing data generated on Illumina equipment. And in addition to our sequencing business, we're also very successful in the microarray genotyping business, with approximately 80% share in DNA genotyping.

We have recently focused more on the diagnostics, trying to expand in our business, and I'll spend some time telling a little bit about our success in reproductive health and talking a little bit about our future focus and our current focus on the cancer aspects of the diagnostic business.

All of this, the sequencing success and the microarray success, our good revenue growth, is really underpin by a very robust history of innovation and a very strong R&D pipeline. We talk about our pipeline today being really exciting for us, and I'll share with you some of the enhancements to our product line that we've disclosed recently and just spend a little bit more time chatting about those.

First of all, let me spend a few minutes here on our markets. We believe we have over $12 billion opportunity today, and that's broken down in the following way: firstly, life sciences research, which is about a $4 billion market, is by far the majority of our revenue. It goes back to our more traditional parts of our business. But as you can see from this chart, there is some really interesting growth areas that we're focusing on. Let me start with the consumer market.

The consumer market is starting to really take off for us now, and I'll spend a few minutes on that on a subsequent slide. But we believe that's a market that's over $50 billion today. The applied market, which would include forensics and agrigenomics, is around $1 billion market. Reproductive health, which is a very key focus of ours, is about $1 billion today. And then, by far, the largest market opportunity is in the clinical and translational space, which would include cancer, genetic disease, molecular disease, for example. All of these markets, really, there's something that's very consistent and common to these markets. And it's really underpin the our mission, which is to improve human health by unlocking the power of the genome. So whether we're focused on consumer, applied reproductive life science, clinical, translational, it's all consistent with our mission of improving human health.

So I'll now turn to our platforms. We have -- as I mentioned before, we have a sequencing and an array business. The revenue split is about 70% sequencing, 30% microarray. We also have a PCR business, which is based on our Eco instrument.

If I start on the sequencing part of our business, our flagship product is the HiSeq family, as you can see on the left of the chart here. The HiSeq family, the HiSeq instrument is the highest output, lowest cost per base and highest accuracy sequencer. We recently implemented or introduced and implemented, an upgrade to that instrument, the HiSeq 2500, which is the only instrument that can sequence a genome in about a day, 27 hours for the instrument with the most recent or most updated cameras. And we've had a lot of success with that instrument recently. MiSeq is our desktop instrument. We shipped over 1,000 units to date by the fourth quarter of last year, so we're very happy with the way MiSeq is going. Genome Analyzer is our previous generation. We also have the HiScanSQ. And then on the array side, we have the HiScan and the BeadXpress.

If I move now to talk about how we actually think about our innovative pipeline and how we focus on the workflow of our customers, it's on a fully integrated end-to-end basis. So we don't just focus on sequencing and sequencing instruments and how to improve the sequencing cost of base or how to improve the sequencing experience, in general, we also focus on the front end, being sample preparation, and on the back end, being analysis. On the front end, we've got a full suite of DNA and RNA and targeted solution that our customers are using. We're gaining share in sample. Perhaps, I'll talk a little bit about those products in a moment. But our customers are using those to improve their sequencing experience.

On the sequencing side, as I mentioned, we already have the industry's leading NGS instruments. And on analysis side, we have a platform called BaseSpace, which is a cloud-based platform, that allows for storage, collaboration and analysis of genomic data.

And then around all of this, we recognize that not every one of our customers either has the capital capacity or the interest in building out their own infrastructures around sequencing, so we provide a sequencing service. Our sequencing service has been very successful, the 10,000th genome was shipped in the last quarter, so we're very pleased with the uptake there.

And we've actually been running a couple of symposiums over the last 6 months or so. The first one was in October, and the second one was more recently called Understand Your Genome, which is where we're trying -- using the benefits of our services lab, we're able to run a whole genome sequencing service and provide our participants to those symposiums with their genome on an iPad, which helps them really understand what's going on with their own genome. It's a very successful symposium, and the feedback on that has been fantastic. So we've done 2, and we're planning to do some more in the near future.

So let me move now, if I could, to our sample prep solutions. As you can see here, we have a lot of sample prep products, whether it's DNA, targeted resequencing or RNA in regulation. We recently introduced the Targeted RNA Expression. This kit is for highly customizable gene expression profiling, and it's technology alternative in the mid-plex real-time PCR market. We think that market is approximately $300 million in size. In addition, our Nextera Rapid Capture Exome Kit is doing extremely well, and we recently announced that a large genome center has switched over to that product.

I would say, in general, across our sample prep business, we're very pleased with the way that's going. As I mentioned before, we are taking a lot of share here not just from the competitive landscape but also from home brew. I think if you make the product economical enough and you make it easy enough to use, then it just becomes much easier for our customers to adopt. And we've certainly seen that recently with our sample prep kits.

I mentioned earlier that we innovate on our products, and we've recently announced a couple of enhancements. I'd like to touch on those a little bit. So if you think about HiSeq, HiSeq has 2 modes today: the high output mode, which is the mode that it was shipped with originally when we first introduced the product for. That can do 600 gigabases in about a 10-day run. And as I mentioned, we also introduced the rapid run mode towards the end of last year. Using that mode, the HiSeq can run a genome in just over a day, 120G. And we recently announced that, that particular instrument, through both a new reagent and some software enhancements, could be expanded to produce 300G in about 60 hours by increasing the read length to 2 x 250.

That 2500 adoption has been really impressive for us. In the first quarter, 2/3 of all instruments that was ordered were of the 2500 variety. So our customers are getting quite excited about that rapid mode, the ability to be able to do it when they need to and to have that flexibility. And in addition, the accuracy of that particular product in that mode has also been very good. So that's another key driver that I think is attracting our customers to that instrument, in particular.

We also saw another kind of change in the trend of this HiSeq instrument in the first quarter. Close to 1/2 of the orders were to commercial, clinical and translational customers so diversifying away from -- as well as to a more traditional base into our non-research, nonacademic customer types, which before was a very interesting trend. In addition, 40% of the HiSeq, when in the first quarter, went to customers who were a first-time HiSeq customer. So you can clearly see that HiSeq is attractive to not only a more diverse set of customers, as well as our traditional customers, but also a set of new customers.

The MiSeq is also benefiting from future enhancements. We've announced that it's currently doing over 8G 2 x 250. We've announced that it will be able to do 15G by long runs of 2 x 300 with 25 million clusters. Both the HiSeq and the MiSeq enhancements will be available in the second half of this year.

In addition, as you can see in orange on this chart, not only have we have we been able to push the SBS chemistry on these products for commercial purposes, we've also been able to do a lot more in the lab. And we've been able to demonstrate a 2 x 400 run on HiSeq, and we've also been able to demonstrate a sample to answer run in less than 24 hours on that same instrument. And on the MiSeq, we were able to do a moon shot run of at least 20G at a 2 x 400 as well on that particular instrument. So the key there is we continue to find headroom in SBS chemistry, and we continue to be able to push our existing instruments further and further.

A minute on BaseSpace. BaseSpace, as I mentioned before, is a cloud application that we've introduced that allows really 3 things: storage, collaboration and application. Storage that allows our customers to on a real-time basis store their whole genome runs or their exon runs or any run they do out on the cloud using BaseSpace. From a collaboration perspective, they can very easily share that information with another investigator anywhere in the world very, very quickly in a way that they haven't been able to do so before. And from an application standpoint, we just recently last week announced the e-commerce functionality for BaseSpace. So now developers are able to put applications on BaseSpace to do a multitude of things that we can now charge for those as we should be, our developers benefit, our benefits. And we're expecting that to be a very interesting way to use BaseSpace. We're expecting some interesting applications in the future.

BaseSpace adoption has been very good, over 40,000 runs and more than 6,000 users on BaseSpace. It's available on MiSeq and HiSeq, more recently, on HiSeq. The MiSeq adoption, in particular, is very high, with something like 75% or so of uses actually uploading health data on MiSeq, which is the information behind the run itself, tells us a lot about how the run is doing, how the machine is doing, if there are any problems with the instruments or reagents, for example. And about 1/2 of those are also uploading actual run data. So very exciting adoption of BaseSpace and hope to see more then in the future.

So if you think about everything I've talked about, the markets, the innovation, the BaseSpace, the sample prep, the end to end, where could this all go? If you fast-forward about 5 years, the way we tend to think about this is there's an ecosystem here, an ecosystem surrounding electronic medical records with genotypic, phenotypic information out on the cloud, where in silico diagnostics could be performed, immediate real-time access to data, informed patients and informed physicians. So a really interesting ecosystem that we're right in the middle of right now, and it's going to be interesting to see how this evolves over time. So that's sequencing.

I want to spend a few minutes on the array business because that is, as I mentioned, about 30% of our business and a very important part of Illumina's products. We have a portfolio of family of arrays, as you can see from this chart. Within that, we have a family focused specifically on exon, which is very economical if you know what you're looking as opposed to sequencing. And the uptake of our exon products over the past year or so has been really impressive for us. And then this year, what we're seeing is a really interesting phenomenon in the consumer market, which I'm going to talk to in a minute. In addition, the array business really supports the agricultural market as well. And we've got some products specifically dedicated to that industry.

So talking about the direct-to-consumer market. This market is really interesting. For us, it's approaching $50 million this year. There are companies that we partner with like 23andMe, Ancestry, Family Tree, National Geographic, who have really unique propositions on what to do with genomic data and how that ties into their own databases and their own information. The market is significantly elastic. We've seen that. It's been tested really well by these companies. And they've now hit what we think is a pricing sweet spot, where for a very moderate sum, you can have your own DNA genotype. And that can be tied into whether it be carrier information, health information, ancestral information and used in a way that really, I think, helps people better understand the genomic makeup.

We've received some large orders for our iSelect product in this consumer space. And we expect this market segment to double over the few years, which will really go a long way to diversifying our own revenue stream, which is one of our goals. And more importantly, I think, or as importantly, it really helps people to engage with their own DNA, which we think is only good for the industry.

So now let me turn to reproductive health. As we think about reproductive health, we're trying to capture that entire health cycle from when people are making the decision to have a child through pregnancy, birth and then into the early stages of life. So if you think about carrier screening, we've recently submitted our cystic fibrosis assay on MiSeq, which we think will be -- hopefully, when that's approved, will be helpful in the carrier screening area. On the infertility factors, we think the basis of many factors may well be genetic, and so this market will be important to sequencing in the future. So that's an area where we could focus on going forward.

We have been focusing on preimplantation genetic screening and diagnostics with our BlueGnome acquisition, a fantastic opportunity to help the IBS cycle with sequencing or actually genotyping, in this case, to make sure that IBS cycles are more effective from both an implantation and a multiple birth perspective.

And then there's prenatal testing, where, through a very simple blood draw, companies like the Verinata company that we acquired, are able to determine if there's any kind of trisomy or other chromosomal issues with a -- at the very early stage of pregnancy, actually in the first trimester. So a completely noninvasive procedure, which is taking off really well, and I've got a slide on that in a moment.

Newborn screening could be a future opportunity, where sequencing could substitute from aspect in hormonal testing somewhere in the future. And then after birth, on the developmental delay side, through our own internal development and our BlueGnome acquisition, we're able to -- we have a cytogenetics products that we also was submitted for FDA approval.

So as you can see, on the reproductive health business, we're really targeting the early stage of pre-pregnancy right way through the early stage of life.

So a few minutes on Verinata just because that's an acquisition we completed recently in February and is been doing extremely well so far for us. It is the -- Verinata is the first noninvasive prenatal test provider to publish published information just in the last weeks, fastest NIPT turnaround time of only 5.1 days and the lowest published test failure rate, 0.7%, meaning 99.3% tests are successful, which goes a long way to reducing future incremental blood draws. The tested adoption is meeting expectations. The test also now includes sex chromosomes, so we've expanded -- and Verinata has expanded the scope of the test.

What's really interesting here is the reimbursement has been exceeding expectations as far as the pace. Through our relationship with PerkinElmer, we've been able to obtain significant coverage decisions at this point. And we have over 80 million lives under coverage for our test, and we're in active discussions with other payers.

So this is -- I think NIPT is an interesting market that really demonstrates how sequencing can be applied to a real world problem and take off very quickly with guidelines and reimbursement decisions being made faster than any of us probably would have expected.

So having focused on a few key areas, where is the future for genomic analysis? I'll break that down into 4 key areas. I mentioned cancer already. The cancer market is very nascent to sequencing, but it's very large and very fragmented. If you think about the stages of cancer and the number of times during an individual's life and during the life of a tumor that sequencing might need to be done, if you think about the different types of tumor and the different types of cancers that can exist, you can see very quickly how fragmented this could be and how large it could be. So we're focusing on that. We've got a number of customers in the space already, and we think that cancer, in particular, is going to be a prime opportunity for sequencing in the future.

Agrigenomics, whether you're think about livestock or crops, for example, is already an area of focus. I think it's going to continue to grow.

Forensics. Forensics is an interesting market. It's one that could move to sequencing in the future, and we're already starting to see that effect now. The key is cracking the database challenges, and we've got projects focused on moving forensics into sequencing. So we're spending some of our R&D investment on that.

And then whole population screening is another area that we think is really going to expand in the future. There are a lot of nations, bodies, states et cetera, that are interested in sequencing entire population. It's obviously a very price-sensitive market and so we think that when the price points are appropriate, and that probably isn't too far away, that these markets, these whole population screening projects will take off. You've already seen some that are at different stages, including some that are happening now on a pilot basis, some that have already earmarked funds. Some nations have already earmarked funds for doing this, and we're involved in many other conversations around this.

Just talking about our financials for those of you that might not be too familiar with our growth. So everything I just talked about is what's been driving this performance of Illumina over the last 5 years. Our revenue has grown at a compound annual growth rate of 19% and earnings per share of 24%. We announced first quarter results recently, and we're very pleased with our performance in the first quarter. Revenue was $331 million, which grew 21% year-over-year. Organically, we grew 18%, and then earnings per share of $0.46 was 28% year-over-year growth. So as you can see, as we get into Q1, we had a very strong start and continue that history of revenue and earnings per share growth.

So let me wrap up by just referencing back to all the markets that I've talked about, how our products address those markets, how our innovation will continue to not only improve our products, make the workflow easier for our customers, reduce the cost per base of sequencing, but help ultimately to penetrate these markets that, as you can see, are very nascent from -- whether it's from the cancer market, which we think is the most under-penetrated today, up to research, which is largely penetrated but still plenty of opportunity for growth.

So we think the opportunity for Illumina, the sequencing is significant. We're going to continue to focus on doing all the things that we've been doing so well so far, and we look forward to continuing to push sequencing and also continuing to drive the array business as we have done in the past.

Thank you very much. I appreciate your time.

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Source: Illumina's Management Presents at UBS Global Healthcare Conference (Transcript)
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