illumina (ilmn) earnings report: q4 2014 conference call...
TRANSCRIPT
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page1of 22
Illumina(ILMN)EarningsReport:Q42014ConferenceCallTranscriptThefollowingIlluminaconferencecalltookplaceonJanuary27,2015,05:00PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
RebeccaChambers;Illumina;SeniorDirector-IRJayFlatley;Illumina;CEOMarcStapley;Illumina;SVP,CFOFrancisdeSouza;Illumina;President
OtherPart icipants
TychoPeterson;JPMorgan;AnalystDougSchenkel;CowenandCompany;AnalystDerikdeBruin;BofAMerrillLynch;AnalystDanArias;Citibank;AnalystRossMuken;EvercoreISI;AnalystAmandaMurphy;WilliamBlairandCompany;AnalystBillQuirk;PiperJaffray;AnalystDanLeonard;LeerinkSwann;AnalystIsaacRo;GoldmanSachs;AnalystSteveBeuchaw;MorganStanley;AnalystJeffElliott;RobertW.BairdandCompany;AnalystBryanBrokmeier;MaximGroup;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator:
Goodday,ladiesandgentlemen,andwelcometotheQ42014Illumina,Inc.,earningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferenceisbeingrecordedforreplaypurposes.
Iwouldnowliketoturntheconferenceovertoyourhostfortoday,Ms.RebeccaChambers,SeniorDirectorofInvestorRelations.Pleaseproceed.
RebeccaChambers (SeniorDirector-IR):
Thankyou.Goodafternoon,everyone.Welcometoourearningscallforthefourthquarterandfiscalyear2014.Duringthecalltoday,wewillreviewthefinancialresultsreleasedafterthecloseofthemarket,andoffercommentaryonourcommercialactivity,afterwhichwewillhostaquestion-and-answersession.Ifyouhavenothadachancetoreviewtheearningsrelease,itcanbefoundintheInvestorRelationssectionofourWebsiteatillumina.com.
ParticipatingforIlluminatodaywillbeJayFlatley,ChiefExecutiveOfficer;MarcStapley,SeniorVicePresidentandChiefFinancialOfficer;andFrancisdeSouza,President.Jaywillprovideabriefupdateonthe
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
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stateofourBusiness,andMarcwillreviewthefourthquarterandFY14financialresults,aswellasdetailourguidancefor2015.
Thiscallisbeingrecorded,andtheaudioportionwillbearchivedintheInvestorsectionofourWebsite.Itisourintentthatallforward-lookingstatementsregardingourexpectedfinancialresultsandcommercialactivitymadeduringtoday'scallwillbeprotectedunderthePrivateSecuritiesLitigationReformActof1995.Forward-lookingstatementsaresubjecttorisksanduncertainties.Actualeventsorresultsmaydiffermateriallyfromthoseprojectedordiscussed.
Allforward-lookingstatementsarebaseduponcurrentinformationavailable,andIlluminaassumesnoobligationtoupdatethesestatements.Tobetterunderstandtherisksanduncertaintiesthatcouldcauseactualresultstodiffer,wereferyoutothedocumentsthatIlluminafileswiththeSecuritiesandExchangeCommission,includingIllumina'smostrecentForms10-Qand10-K.
BeforeIturnthecallovertoJay,IwouldliketoletyouknowthatwewillparticipateintheCowenHealthCareConferenceinBostontheweekofMarch2.Forthoseofyouunabletoattend,weencourageyoutolistentothewebcastpresentation,whichwillbeavailablethroughtheInvestorRelationssectionofourWebsite.
Withthat,IwillnowturnthecallovertoJay.
JayFlat ley(CEO):
Thanks,Rebecca,andgoodafternoon,everyone.I'mverypleasedtoreportthatQ4wasanotherrecordquarter,whichclosedoutarguablythemostimpressiveannualperformanceinthehistoryoftheCompany.Revenueincreased32%yearoveryearto$512million,our13thquarterofsequentialrevenuegrowth.
Equallyimpressivewastheleveragewedeliveredthisquarter,asnon-GAAPearningspersharegrew93%comparedtothefourthquarterof2013.Theserecordresultswereduetostrongunderlyingtrendsacrossourcustomersegmentsandsequencingportfolio,solidoperationalexecution,andagreater-than-anticipatedtaxbenefit.
Fourth-quartertotalsequencingrevenuegrew48%yearoveryear,drivenbydemandacrossourplatforms,recordconsumables,andcontinueduptakeofourproductsacrossmarketsegments,applications,andexperimentalscales.
Sequencinginstrumentrevenuegrew93%comparedtothefourthquarterof2013,drivenbydemandfortheNextSeq500andtheHiSeqXinstruments.Inaddition,HiSeqandMiSeqagainexceededourprojections,ascustomerscontinuetoviewtheseinstrumentsastheNGSgoldstandardintheirrespectivesegments.
AswesharedattheJPMorganconference,inQ4weaddedthreenewHiSeqXTencustomers,andbookedatotalof37systems.Wenowhave18customerswhohaveordered201systems;134ofwhichshippedin2014.
Aspredicted,Q4sawnoticeablyfewerXshipmentsduetothetimingofcustomerreadiness.Goingforward,ourorderfunnelremainshealthy,atrendthatweprojectwillcontinueinto2015.
Werecentlyannouncednewadditionstoourportfolio,whichnowincludesHiSeqXFive,aswellastheHiSeq3000and4000.Earlycustomerfeedbackhasfurtherfueledourexcitementaroundthisexpandedfamilyofhigh-throughputsequencers,whichwebelieveoffertremendousflexibilitytoaddressvariousbudgetsandscientificpriorities.Weexpectmanylabswillhavemultipleversionsofourinstruments,andusethemtomeetdifferentoutput,time,andeconomicdrivers.
TheintroductionofXFive,whichwillshipinQ2,allowsadoptionofwholegenomesequencingwithalowercapitalinvestmentandanattractivepricepergenome.TheintroductionofthisconfigurationwasnotpromptedbyalackofdemandfortheHiSeqXTen.Instead,it'sclearthatprovidingalowerentrypricetotheX
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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technologywillgrowtheoverallmarketmorequickly,andacceleratetheevolutiontosequencingfullgenomes.
TheHiSeqfamilyhasarichdevelopmentroadmap,includingtheenablementofpatternedflowcelltechnology,withtheintroductionoftheHiSeq3000and4000.Goingforward,webelievemostcustomerswillpreferthesenewsystemsoverthe2500,giventheimprovedeconomicsandthroughput.Therewillbeanumberofcustomerswhoremainonthe2500,however,duetotheuseofvalidatedworkflowsortheimportanceofaccesstorapidrunmodeandlongerreads.
Theintroductionofthesesystemswillfurthercatalyzethereplacementcycleofoldergenerationinstruments.Weestimatethatapproximately1,000HiSeq'sinthefieldcannotrunthe[OneT]kits.Thesesystemsarestrongcandidatesforreplacementoverthenextthreeyears,ascustomersevaluatetheirruncosteconomics.
DuringQ4,demandforHiSeq2500exceededourexpectations.ShipmentsinthequarterweresimilartothelevelsseeninQ42013;andintheAmericas,ordersreachedthehighestlevelseeninthepasttwoyears.Toensurecustomersatisfaction,weareofferingaspecialpromotionaltrade-inprogramtolabsthatreceived2500sinQ4.Asaresult,wedeferredasmallamountofrevenuetoaccountforthisprogram,whichwillberecognizedoverthefirsthalfof2015.
MovingtoNextSeq,sequentialordertrendsremainedstrong,withapproximately15%sequentialgrowthinQ4.Incomingorderscontinuedtobefueledbytheover2,500newleadswegeneratedfromtheroadshowconductedshortlyaftertheproductlaunch.Theseleadscontributedtoanaccelerationofadoptionbycustomersinthefourthquarter,andaccountedforclosetohalfofallorders,upfromthe30%wesawinthethirdquarter.
NextSeqcontinuestodrawsignificantinterestfromtheoncologymarket.Inthefourthquarter,shipmentstothissegmentgrew50%sequentially,andincludedamulti-unitorderforareferencelaboratorythatisscaledtoproductionlevel,bodingwellforfutureconsumableutilization.Thefirsthalfof2015willseetwoenhancementstothisplatform,withtheavailabilityofthev2chemistry,aswellasthelaunchoftheNextSeq550.
Thev2chemistryvastlyimproveserrorrates,nowconsistentwithourmorematureplatforms.Asaresultofthisimprovedperformance,themachineisnowsufficientlylockeddowntoprepareforopenplatformclearance,whichweexpectlaterthisyearorearly2016.
AvailableinQ2,theNextSeq550furtherenhancestheplatform'sflexibility,addingthecapabilitytoscanvchips.Initially,we'vequalifiedourcytoandkaryomappingarrays,andwilldecidewhethertoenableotherarraysbasedonmarketfeedback.
Thisfunctionalityisparticularlyimportantinreproductivehealth,asitprovidesaccesstoourarrayandsequencingtechnologywithasingleCapExinvestment.We'reverypleasedwiththeroll-outoftheNextSeqplatformoverall,andbelievedemandforthisinstrumentwillbeenhancedwiththesenewimprovements.
MiSeqcontinuestooutperformourexpectations.Ordersandshipmentsbothexceeded300unitsinthefourthquarter,thehighestlevelseensincethelaunchin2012.New-to-Illuminasequencingcustomersdrovethisoutperformance,andaccountedformorethan60%oforders.RecordordersfortheMiSeqDxweregeneratedfromcustomersinterestedinclinicalmarkets,includingHLAandcysticfibrosistesting.
Additionallyinthefirstquarter,wewillenablev3chemistryontheMiSeqDxinRUOmode,andplantoupdatetheintendedusetosupportFFPEsamples.Ourcompetitivepositioninthismarketstrengthenedthroughout2014,whichwebelievewillcontinuewiththeintroductionofourHLAandforensicsample-to-answersolutions.
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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Movingtoarrays,wecontinuetowitnessgrowthinsamplevolumes,butatlowerprices.In2014,volumesgrew5%comparedtotheprioryear;butduetoaggressivepricing,totalmicroarrayrevenuewasdown6%forthefullyear,includingadeclineof11%inQ4.Despitethisreductioninrevenue,ourag,IVF,andbiobankactivitieshavebeenstrong.
In2014,large-volumeopportunitiesinbothcropsandlivestockresultedinapproximately2millionsamplesshippedtohigh-throughputbreedingoperations,a47%increaseversustheprioryear.Wewillcontinuetofocusonarraysasacriticalcomponentofouragbusiness,andexpectsampleshipmentgrowthtoexceed25%in2015.
TheIVFmarketalsocontinuestogaintraction.Thisbusinessisnowapproaching$30millioninannualrevenue,withagrowthof36%yearoveryear.Wealsoremainfocusedonbiobankingactivities,andasaresult,introducedourMEGAarrayinthefourthquarter,whichprovidesanimprovedunderstandingofdiseasesandphenotypesacrossdiverseglobalpopulations.Webelievethisproductwillprovideuswithasuperiorcompetitivepositioninginthebiobankingmarket.
Asanexampleofourlong-termcommitmenttoarrays,weplantoincreaseourR&Dinvestmentin2015,expandourconciergeserviceforcustomproducts,andbroadenourcommercialactivities.Asaresultoftheseadditionalinvestments,weareprojectingarrayrevenuetobeapproximatelyflatin2015.
Weremainfocusedondeliveringcompletesample-to-answerworkflowstoenablenewmarkets.ThisstrategyincludesofferingssuchasNeoPrepandourHLAproduct,bothofwhichareexpectedtoshipthisquarter.Thestrategyalsoextendstoourforensicsgenomicsystem,whichisnowshipping.Withasingleworkflow,thissystemenableslabstoperformamorerobustanalysisofabroaderrangeofgeneticmarkersthanwithexistingtechnologies.
Overall,ourmarketopportunitiescontinuetobroaden,asdemonstratedbycommercial,non-profit,andhospitalcustomersaccountingforapproximately55%ofshipmentsinboththefourthquarterand2014overall.Thisyearwemadegreatprogressonourstrategytoenableclinicalmarkets,as30%ofourinstrumentswenttoclinicallaboratories.
Additionally,salestotheoncologymarket,forbothresearchandclinicalapplications,grew40%comparedtotheprior-yearquarter.In2015,wehopetofurthercatalyzethismarketwithprogramssuchasourrecentlyannouncedActionableGenomeConsortiumandourdevelopmentprograminliquidbiopsies.
Liquidbiopsiesareexpectedtoplayaroleacrossmultiplesegmentsoftheoncologymarket.WearefocusedonfirstdeliveringanRUOkitintothemarket,andexpecttobeinapositiontopresentclinicalutilitydatabyyearend.WewillrunthistestatIllumina'sRedwoodCityCLIAlabtorefinetheproductanddevelopdataforFDAsubmission.SimilartoNIPT,ourstrategyhereistoprovidethebesttechnologyintothemarket,asopposedtoofferinglong-termlabtestsor[sellingtophysicians].
Movingnowtoreproductiveandgenetichealth,themarketcontinuestodeveloponaglobalscale,whichresultedin47%revenuegrowthin2014comparedtotheprioryear,withNIPTsamplesgrowing31%sequentiallyinthefourthquarter.Aswementionedlastquarter,werecentlyundertookanassessmentofourentireregulatorystrategy,whichwasledbyourMyraqateam.
We'reworkingwiththeFDAtodeterminetheappropriateclaimsanddatasetstobroadenthismarkettoincludetheaverageriskpopulation.WewillsharemoredetailedscheduleinformationoncewealignwiththeFDA.
InQ2,wewilllaunchournewVeriSeqNIPTassay,whichwebelievewillenablebroaderadoptionofprenataltestinginglobalmarkets.Basedonpaired-endsequencing,thisassayisideallysuitedfordecentralizingNIPT,duetoitsabilitytosequence48samplesperrun,andthesignificantworkflowandcostbenefitsderived
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
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byeliminatingPCR.
Withthedevelopmentofthisnewassay,wearemovingforwardwithwhatwebelievetobeasuperiorregulatorystrategy.ThisincludesgainingCEIVDmarkingfortheHiSeqsoftwareinEurope.
Additionally,weplantogainaCEmarkontheVeriSeqNIPTassay,andtheassociatedsoftware,whichwillenableustodistributethisproductasanIVDacrosstheEU,astepthatwebelieveisnecessarytodevelopandpenetratethislargemarketopportunity.Asaresultofthesestrategychanges,aswellasrecentenhancementswehavemadetotheHiSeqfamilyofproducts,wedecidedtosuspendoureffortstoseekFDAapprovaloftheHiSeq2500intheUS.
Insummary,ourQ4and2014resultsexceededourexpectations,andourmomentumremainsstrongasweenter2015.Ournewproductintroductionswillcontinuetofuelthehigh-throughputmarket,furtherenablingcustomerstotailortheirfleetofinstrumentstomeetdiverserequirements.
Withthemostpowerfulandwell-positionedsequencingportfolioavailable,ourtechnologyleadershipisdeliveringrobustdemandandanexpansionintonewmarkets.Ourfocusoninnovationisstrongerthanever,andlookingahead,weexpecttodeliversignificantshareholdervalueasweunlockthepowerofthegenome.
I' llnowturnthecallovertoMarc,whowillprovideadetailedoverviewofthefourth-quarterresults.
MarcStapley(SVP,CFO):
Thanks,Jay.AsJaydescribed,Q4markedanothersolidperformanceforIllumina,tocloseoutarecordyear.Revenuegrew31%in2014versustheprioryear,to$1.86billion,reflectingtheimpactofthenewHiSeqXTenandNextSeqinstruments,aswellaslower-than-expectedcannibalizationofMiSeqandHiSeq.
Reportedfourth-quarterrevenuegrew32%yearoveryeartoapproximately$512million.Thisstrongresultcanbeattributedonceagaintorecordsequencinginstrumentsandconsumables.Thecombinedimpactofunfavorableforeignexchangefluctuations,aswellasdeferralofrevenuerelatedtoourHiSeq2500trade-inprogramforinstrumentsshippedinQ4,resultedina$15-millionheadwind.
Globalinterestinourproductsremainedstrongduringthefourthquarter.ShipmentsintheAmericasgrew34%yearoveryear,andEuropeanshipmentsincreased33%overthesameperiod.InAPAC,shipmentsgrew8%yearoveryear,asstrengthinChinawaspartiallyoffsetbyadeclineinJapan,asfundingdisbursementsremainedconstrainedintheregion.
Instrumentrevenuegrew75%yearoveryeartoreach$156millioninthefourthquarter.ThisincreasewasprimarilydrivenbydemandforNextSeqandHiSeqXTen,aswellasstrongMiSequnitshipmentsandstableHiSeqsales.
Overallconsumablerevenueinthequarterwas$290million,anincreaseof19%comparedtothefourthquarterof2013,ashigherdemandforsequencingconsumableswaspartiallyoffsetbyadeclineinarrays.Consumablerevenuerepresented57%oftotalrevenue,modestlyhigherthanthe54%wesawinQ3,butdownfrom63%intheprior-yearperiod.Thisdecreaseyearoveryearwasduetothestrengthinsequencinginstrumentsduringthequarter.
Sequencingconsumablerevenuegrew32%overQ4lastyear,duetoourlargerinstalledbaseofinstruments,includingtheadditionofHiSeqXTenandNextSeq,andreachedrecordlevelsduringthefourthquarter.ShipmentsofourSamplePrepproductsbenefitedfromthepricereductionweputinplaceinQ3,whichwasmorethanoffsetbyincreasedvolumes,ascustomerdemandforourcoreDNAandRNAlibraryprepproductsgrew.
MiSeqconsumablepull-throughremainedwithinourprojectedrangeof$40,000to$45,000.HiSeqpull-
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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throughperinstrument,excludingHiSeqX,wasroughlyflatsequentially,andcomfortablyinourprojectedrange.Infuturequarters,pull-throughforHiSeq2500,3000,and4000willbereportedasafamilyofinstruments,andwecontinuetoprojectarangeof$300,000to$350,000.
Inthefourthquarter,consumableutilizationforNextSeqandHiSeqXTenwasaboveourforward-lookingguidancerangesthatweprovidedonJanuary12.Thisisafunctionofhowwecalculatepull-through,whichgenerallyresultsinanartificiallyhighnumberinthefirstyearoflaunchduetotherampintheinstalledbase.
Asareminder,weareprojecting$80,000to$100,000ofannualconsumablesonNextSeq;andonHiSeqX,includingXTenandXFivecombined,weareexpectingtogenerate$600,000to$650,000peryearofreagentutilizationperinstrument.
Servicesandotherrevenue,whichincludesgenotypingandsequencingservices,instrumentmaintenancecontracts,andrevenuefromNIPTservices,grew22%versusQ42013,to$62million.Thisimprovementwasdrivenbygrowthinourextendedmaintenancecontractsassociatedwithalargersequencinginstalledbase;NIPTservices,whichbenefitedfromtestfees,aswellasincreasedtestsend-outrevenue;andstrengthingenotypingservices.
Turningnowtogrossmarginandoperatingexpenses,Iwillhighlightouradjustednon-GAAPresults,whichexcludelegalcontingencies,non-cashstockcompensationexpense,andotheritems.IencourageyoutoreviewtheGAAPreconciliationofnon-GAAPmeasuresincludedintoday'searningsrelease.
BeforeItalkaboutthetrendsforthequarter,IwouldliketohighlighttheGAAPtreatmentoftwosignificanttransactionsthatwearepleasedtohaveresolvedinQ4.Firstly,wesettledtheSyntrixlitigationforanamountlessthanourprioraccrual,resultinginanaccountinggainof$109million;$27millionofwhichwasrecordedincostofrevenue,and$82millionofwhichwasrecordedinoperatingexpense.Inaddition,werecordeda$30-millionintangibleasset,reflectingthefuturebenefitofthelicenseacquired.
Secondly,weenteredintoanagreementwithSequenom,resultingin,amongotherelements,thepoolingofourpatents.Asaresultofthistransaction,werecorded$49millionoflegalcontingencycostsinresearchanddevelopmentexpenses,reflectingtheupfrontpaymentswemadetoSequenom.Bothoftheseitemshavebeenexcludedfromournon-GAAPresults.
Turningnowtomargins,ouradjustedgrossmarginforthefourthquarterequaled72.3%comparedto73.2%inthethirdquarter.Thesequentialdeclineisduetotheimpactofdeferredrevenueandotheritemsassociatedwiththenewproductintroductions,partiallyoffsetbythehighermixofconsumables.
Yearoveryear,adjustedgrossmarginsexpanded90basispointsfrom71.4%to72.3%,asthelowermixofconsumableswasmorethanoffsetbyimprovedinstrumentmarginsandmanufacturingefficiencies.Additionally,GAAPgrossmarginexpanded820basispointsversustheprioryeartoequal75.1%,primarilyduetotheaforementionedgainontheSyntrixlitigation.
Adjustedresearchanddevelopmentexpensesforthequarterwere$80million,or15.7%ofrevenue,comparedto$70million,or14.6%ofrevenueinthethirdquarter.ThesequentialincreaseinR&Dexpensewasprimarilyduetoheadcountadditionsandotherexpensesrelatedtoournewproducts.OnaGAAPbasis,theincreaseinresearchanddevelopmentexpensesto$143millioncomparedto$85millioninQ3wasprimarilyduetotheupfrontSequenompaymentpreviouslymentioned.
AdjustedSG&Aexpensesforthequarterwere$97million,or18.9%ofrevenue,comparedto$91million,or19%ofrevenue,inthepreviousquarter.Thesequentialincreaseinexpensewasprimarilyduetocommissionpaymentsarisingfromtheexcellentyear-endperformance,andhigherheadcounttosupportourrevenuegrowth.
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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Adjustedoperatingmarginswere37.7%comparedto39.7%inthethirdquarter,adecreasesequentiallyduetolowergrossmarginandincreasedinvestments.Operatingmarginwashighercomparedtothe32.3%wereportedinthefourthquarteroflastyear,duetotheimpactofimprovedgrossmarginandoperatingexpenseleverage.
Inthefourthquarter,werecognizedapproximately$700,000ofadjustedotherexpense,primarilyduetotheimpactofforeignexchange.Duringthequarter,ourstock-basedcompensationwas$38million,lowerthanthe$45millionreportedinQ3,whichwaselevatedasaresultofadditionalaccruedexpenseforourperformancestockunits.
Ournon-GAAPtaxrateforthequarterwas16.2%comparedto32.6%inthefourthquarteroflastyear,lowerprimarilyduetothefull-yearimpactoftheR&Dtaxcreditandothertaxextenderswhichwereenactedinthefourthquarter.Thefourth-quarterratewassignificantlybetterthanweexpectedatthetimeofourrecentpre-announcement,aswebenefitedfromfavorableadjustmentsrelatedtomultipleprior-yearprovisionsandhigher-than-expectedstockdeductions.
Thesefavorableitems,whichsurfacedinthelastfewweeksaspartofournormalquarterandyear-endcloseprocess,equatedtoapproximately$0.06ofEPSimprovement.Excludingtheimpactoftheseitems,theQ4non-GAAPtaxratewouldhaveequaled22%;andforthefullyear,ournormalizedtaxratewouldhavebeen28.2%,whichexcludesalsothefavorabletaxitemwenotedinQ3.
Non-GAAPnetincomewas$129millionforthequarter,andnon-GAAPEPSwas$0.87.Thiscomparestonon-GAAPnetincomeandEPSof$65millionand$0.45,respectively,inthefourthquarterof2013.WereportedGAAPnetincomeof$153million,or$1.03perdilutedshareinthefourthquarter,comparedtonetincomeof$81million,or$0.56perdilutedshare,intheprior-yearperiod.Current-periodresultsincludetheaforementionedSyntrixlitigationgain,whichwasoffsetinpartbytheSequenomexpenseitem,andtheirassociatedtaximpacts.
Wegeneratedcashflowfromoperationsof$141millioninthefourthquarter,evenaftertheoutflowof$51millionduetotheSyntrixsettlementandSequenomagreement.Forthefullyear,cashflowfromopswas$501million,anewrecord.Q4DSOwas51days;aslightimprovementfromthe52daysseeninthepriorquarter.
CapitalexpendituresinQ4were$35million,resultingin$106millionoffreecashflow.Duringthequarter,werepurchasedapproximately185,000sharesfor$35million,andwehave$130millionremainingunderourpreviouslyannouncedprograms.Weendedthequarterwithover$1.3billionincashandshort-terminvestments.
Turningnowtoourexpectationsfor2015,weareprojectingapproximately20%totalCompanyrevenuegrowth,andnon-GAAPEPSof$3.12to$3.18.Thisguidanceassumescurrentcurrencyrates,whichwouldresultina200-basis-pointheadwindtogrowthcomparedtolastyear.
Additionally,weareprojectingapproximately73%grossmargins,full-yearweightedaveragenon-GAAPdilutedsharesoutstandingof150million,andafull-yearpro-formataxrateof28%,whichdoesincludethe2015federalR&Dtaxcreditandothertaxextenders.Formodelingpurposes,wefeelitisappropriatetoassumethetaxcreditispassedinQ4;andatthattime,wewillrecordthefull-yearimpact.Therefore,atthispoint,weexpectaQ1taxrateofapproximately29%.
Insummary,wedeliveredremarkablefourth-quarterresults,includingimpressiverevenuegrowthoverastrongprior-yearquarter,aswellas93%growthinnon-GAAPdilutedearningspershare,whichcappedoffanexceptional2014.Thisyearwemadesignificantprogressonourmarketdevelopmentstrategies,andwelookforwardtopushingtheseinvestmentsevenfurtherin2015.Webelieveourstrategyoftechnologyleadershipandmarketenablementwillcatalyzetheadoptionofgenomics,andenableustoaddressthemorethan$20billionmarketopportunitywehaveaheadofus.
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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Thankyouforyourtime.WewillnowmovetotheQ&Asession.
(CallerInstructions)
Operator,wewillnowopenthelineforquestions.
QUESTIONS&ANSWERS
Operator:
(OperatorInstructions)
TychoPeterson,JPMorgan.
TychoPeterson(Analyst-JPMorgan):
Thanks,guys.
Questionaboutmaybejustanythoughtsyoumighthaveaboutcannibalizationwith3000,4000,andtheNextSeq5500.You'veobviouslydoneagoodjobinthepastmitigatingcannibalizationofthecurrentportfolio,butmaybetalktowhereyouseesomepotentialcannibalizationforthecomingyear?
JayFlat ley(CEO):
The550willbeapurelyincrementalproductanditwillbeasmallincrementontopofthestandardNextSeqbase,sinceisreallydesignedtoappealtothatsetofcustomersthatneedtorunaraiseandsequencingtogether.That'snotahugepartoftheoverallmarket,sowedon'tanticipateanydirectcannibalizationthereatall.
Withrespecttothe3000/4000,aswealludedtointhescript,wedothinkthatcustomersingeneralwillprefergettingonthenewerroadmap.Thosewhohavetheabilityandthefundstoupgradefrom--ortochangeout2500sorwhoarebuyingnewinstrumentswilllikelyfavorthe3000andthe4000.
Wealsopricedthe3000version,whichisthesingleflowcellversionrightontopoftheoldpriceoftheHiSeq2500.Thatwasdoneintentionallyforthosecustomerswhomayhavehadgrantsortendersinplaceandwouldbeabletoconvertthefundsthattheyhadallocatedfora2500directlytoa3000.
Sothenetofthatisthatwedoexpectsignificantcannibalizationoverthenextyearofthe2500,butacatalyzingeffectontheolderinstalledbasetotradeouttheolder2000sandearlyversion2500sforthenewertechnology.
TychoPeterson(Analyst-JPMorgan):
ThenaswethinkabouttheimplicationsofdecouplingtheXTenwiththeXFive,youmentionedthatdidn'timplyanyslowdownindemandforXTen,butcouldyouhaveabetteryearinorderswithXFiveandXTencombinedin2015thanyoudidin2014withjusttheXTen?
JayFlat ley(CEO):
Wecertainlycould.Thereasonwedidthisisbecause,asImentioned,wethinkwecangrowtheoverallmarketfaster.DemandforXTencontinues,andsincewemadetheannouncementoftheXFiverecently,ourassumptionstherehavebeenvalidated,sothereisquiteafewcustomersthatwehavetalkedtowhohavebeeninourqueuewhocontinuetopushforwardwithanXTentypepurchase.
WeareprettyconfidentthatmostofthatpipelinewillcontinuetodrivetowardanXTen.SomeofthemwhomightnothavegottenthereforquitesometimemaybeabletojumpinnowsoonerwithanXFiveandthen
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Industry:DrugsEventDescription:Q4 2014 EarningsCall
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upgradetoaTenunitconfigurationovertime.
Sooverall,wethink,wecertainlyaregoingtogrowthemarketfasterthan2015wouldhavebeenonitsownandwehavethepotentialtogrowtheoverallXunitsfasterin2015thanwedidin2014.
TychoPeterson(Analyst-JPMorgan):
Okay.IfIcouldaskonelastquickone.
Canyouquantifythedeclineinarraypricingthatyoucalledout?Areyouassumingthatthere'sanotherlegdownonpricinginarrays?Iknowyoutalkedaboutrevenuesandarraysbeingflatbuthowmuchofthepricingcomedown?
JayFlat ley(CEO):
There'ssomanydifferentarraysinourproductline,Tycho.Iwouldguessnowthereis25or30differentarrayproductsthatweoffer.Thepricesaresodifferentandthemarketsegmentsaresodifferent,itishardforanaveragetomakemuchsensethere.AndIdon'tactuallyhaveanumberatmyfingertips.
Butyoucanexpectarraypricingtocontinuetogodownoverthenextfewyears,particularlyasmorecustomersmigratetowardssequencingandthebusinessthattendstostayonmicroarrayswillbethelessandlesscomplexpartofthemarket.Youwillsee,forexample,ourhighcomplexityarrayslikethe2.5millionandthe5millionarraysbeasmallerandsmallerpartoftheproductlineandthoseareclearlythehighestpricedchips.SoyouwillcontinuetoseetheoverallASPinarraysgodown.
TychoPeterson(Analyst-JPMorgan):
Okay,thankyouverymuch.
Operator:
DougSchenkel,CowenandCompany.
DougSchenkel(Analyst-CowenandCompany):
Heyguys.Goodafternoon.
YoucontinuetodemonstratetheabilitytoinnovateandadvanceusingSBSchemistry,asdemonstratedbytherecentlyannouncednewproductsandsomeoftheadvancementslinkedtopatternflowcells,andclearlythisinnovationputsyouinapositiontogeneraterobustgrowth,maybetolevelsthatexceedwhat'sinconsensusexpectations.
Allthatsaid,theinvestmentcaseformaterialupsidefromcurrentsharelevelsseemstobelargelypredicatedonnotjustthelargeTAMthatexistsforyouguysbutonbuildingconfidenceinyourabilitytocapturethatTAM.
Sowhenwethinkabouttheclinicalopportunity,whatmilestones,specifically,shouldinvestorsmeasureyoubyin2015,including,butgoingbeyond,whatyoutalkedaboutforliquidbiopsyinyourpreparedremarks?
JayFlat ley(CEO):
WhenyouthinkabouttheTAMthatwetalkedaboutayearago,the$20billionnumber,thereisanumberofkeythingsyououghttowatch.Theyareprobablynot--milestone,perhaps,isalittlebitofastrongwordbecausethesearen'tbigdigitalevents,butit'scontinuedprogressinthedevelopmentofkeymarkets.
CertainlyinPOPSEQ,watchingwhathappensthere,wehadtheScottishgenomesprogramthatwe
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announcedjustrecently.Weareyettounderstandexactlyhowthose15unitsaregoingtobeused,butearlyindicatorsarethat,thatprogrammayevolvetobesomethingnottoodissimilarfromwhatGeListryingtoaccomplish.ThatwouldbethenumbertwoprojectwewouldputinthePOPSEQprogram.
Clearly,whathappenedintheStateoftheUnionaddressatleastalludedtothepotentialofsomeprecisionmedicineprogramsintheUS,whichwouldbeveryexciting,ofcourse,ifthatwounduphappening.Watchingthatcontinuedprogress,particularlywiththescaleofthoseprojects,willbeimportantannouncementsforinvestorstowatch.
Intheclinicalspace,whatwe'redoingwiththeactualgenomepanelandtherolloutofproductsthere.Theadditionalpharmaceuticalcompaniesthatmaycomeintotheconsortiumwillbeevidenceofcontinuedprogress.Oncewestartdeployingtheactualgenomepanelintothemarket,monitoringtheuptakeofthatpanel,willbeimportantdatatowatch.
Clearly,liquidbiopsiesisabreakthroughopportunityforanybodywhoisworkinginthatarea,andourgoalis,asImentionedinthescript,togetsomeclinicaldata,somereallyimportantclinicaldatadonebytheendof2015soIthinkthatwillbecritical,aswell.
NIPT,IwouldwatchtheexpansionintoEuropeandChina,inparticular.Thenewproductweannouncedthere,theVeriSeqNIPTisgoingtobeakeyingredientofthatexpansiontiedtotheCEmarketingthatweareworkingonintheEU.
DougSchenkel(Analyst-CowenandCompany):
Allright.That'sreallyhelpful.
ThenactuallystickingwithNIPT,I'mjustcuriousifyoucangiveusalittlemorecoloronwhatpromptedthealterationinthePMAstrategythere?WasitlargelyafunctionofthenewadditionofMyraqa?Wasinchangesinregulatoryreimbursementorcompetitivedynamics?Weretheretechnicaldevelopments,suchasmaybethechangeintheHiSeqs2500FDAstrategy?
Intermsoftimelines,whatisareasonableexpectationforus,aswethinkaboutgettinganupdatefromyou?
JayFlat ley(CEO):
Iputthestrategychangeintwogeneralbuckets:oneisproductevolutionandIwilltalkspecificallyaboutthat;andthesecond,Icallmarketevolution.Onthetechnologyfront,whatwehavedonewiththe3000andthe4000areveryimportantbreakthroughsthatwehavemadeoverthepastcalendaryear.Wewereworkingonthe2500submissioninparallelwiththat.
Oncewegottothepointwhereweknewweweregoingtolaunchthe3000,4000configurations,ifyouthinkaboutwherethe2500wouldbeatthetimeitwouldcomeoutofthePMAsubmission,forexample18monthsfromnow,whichwouldbethetimeframethatwehadanticipated,thatproductisgoingtobeprettylonginthetooth.Sowethoughtthatitsadoption,approvedorotherwise,beginning1.5yearsfromnowwouldn'tbehigh.
ThesecondpartthattiestothatfromamarketperspectiveisthatwethinktherealgrowthopportunityintheUSmarketisn'tsomuchinthehigh-riskspace,itisintheaverageriskmarket.Sowewerereallyfocusedonhowdowegrowthemarkettoembraceaveragerisk.Todoasubmissiononlyonhigh-risk,wethoughtwasalsolimiting.
Sotherefore,we'vebeenworkingwiththeFDAtodefinewhatdowehavetodotogetanaverage-riskapproval.Withthebreadthofthatmarketplace,wethinktheotherassaymethodthatwehavedeveloped,sothesecondpartofthetechnologyevolution,theVeriSeqNIPTassay,isabettertechnicalsolutiontoabroader,morediversemarket.Thatistrue,certainlyinEurope,andwethinkbythetimewegetthroughPMA
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application,itwillbetrueintheUS,aswell.
Thosearetheunderlyingfactors.Nowofcourse,bringingintheMyraqateamgaveustheabilitytostandbackanddoafullanalysisofourentireregulatorystrategyacrosstheCompanyforallproductsandthatgroupwasinstrumentalinhelpingustunethisstrategyandmakesomeimportantchanges.
DougSchenkel(Analyst-CowenandCompany):
Thelastpartofthatquestionwasjustintermsoftiming.Isitreasonabletothinkwewillgetmoreofanupdatethisyear,givenalotofthisitsoundslikeitislinkedtoreallytheeffortsthatyou'remakingtogetherwiththeFDA?
JayFlat ley(CEO):
It'sreasonabletothinkthatwewillhaveanideathisyearaboutwhatweneedtoaccomplish.Iwouldn'tnecessarilythinkit'sreasonablethatwewouldhaveasubmissionthisyear.
DougSchenkel(Analyst-CowenandCompany):
Okay.Thanks,again.
Operator:
DerikDeBruin,BankofAmerica.
DerikdeBruin(Analyst-BofAMerrillLynch):
Hi,goodafternoon.
JayFlat ley(CEO):
Hi,Derik.
DerikdeBruin(Analyst-BofAMerrillLynch):
Ihavetwoquickquestion.Oneisjustahousekeepingquestion.
Thestockoptionexpense,Marc,waslowerthanwehadprojectinginQ4.Canyougivesomeguidanceonthe2015numberthere?
MarcStapley(SVP,CFO):
Yes.ForQ4,relativetoQ3,Ithinkyou'rereferringtothesequentialdrop?
DerikdeBruin(Analyst-BofAMerrillLynch):
Yes,exactly.
MarcStapley(SVP,CFO):
Q3wasmoretheanomalytherethanQ4.InQ3,wehadanuptickinexpenseratetoourperformanceshareplan,giventheoutperformanceoftheCompany,andthatwaslessmarkedinthefourthquarter.
Intermsof2015,wehaven'tbifurcatedthestockexpensefromtheotherexpenselineitems.Itisembeddedinourguidance,butit'sprobablynotfarofffromthecurrentfourth-quarterrate.
DerikdeBruin(Analyst-BofAMerrillLynch):
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Perfect.AndthenbackontheNIPTmarket,IbelievewearewaitingforapprovalfortheChinaSFDA.Whendoesthathappen?AndsomethoughtsonusingarraysforNIPT?
JayFlat ley(CEO):
TheCFDAisablackbox,sowedon'thavemuchvisibilityintowhenthesubmissionmaycomeouttheotherend.We'rehopingitismonthsaway,notmateriallylongerthanthat,butthefactofthematteriswejustdon'tknow.Sowe'rewatchingthatveryclosely.
Withrespecttoarrays,Iwouldsay,wecontinuetobelieveverystronglythatsequencingisasuperiormethodologyfordoingNIPT.Itismuchmoreflexible,youcanaddtests,wethink,particularlyonturnaroundtime,thisnewNextSeqmethodisaone-dayturnaroundtimeonthesequencer,soit'sextremelyefficient,48samplesinparallel,verycost-effective.SoweareextremelyconfidentinsequencingbeingthemostimportantplatformfordoingNIPTtesting.
DerikdeBruin(Analyst-BofAMerrillLynch):
Thanks.
Operator:
DanArias,Citigroup.
DanArias (Analyst-Citibank):
Afternoonguys,thanks.
Wantedtoaskmaybeabiggerpicturequestiononsequencinginstrumentation.Jay,Ithinkawhilebackyouareaskedoryoumadeacommentaboutsequencing[installs]relativetothenumberofPCRsystemsthattherewereoutthereasaninstalledbase.
Asyouguyshavebroadenedtheportfolioandstartedtogoaftersomeofthesenewmarkets,doyouhaveabitofanupdatedviewonthetotalnumberofsequencersthatyouthinkcouldbeinthemarketin,say,fiveyears?
JayFlat ley(CEO):
Wecouldcreateonehere.Noonehasaskedmethequestionrecently.Ithinkweusedtotalkaboutthecapillarynumberbeinginthe10,000to15,000asonemetrictouse,thatifyouthoughtaboutPCR,thereisabout50,000researchlabsworldwide,vastlymoreifyouconsideredalltheclinicallabs,andit'sraretofindoneofthoselabswithoutaPCRmachine.SothePCRinstalledbaseisaprettyhighnumberandmanylabshavelargenumbersofPCRmachines,sothat'saverylargeinstalledbase.
Settingoursightsoversayafive-yeartimeframeofbeinginthe10,000to15,000numberofNexGensequencerswouldbeconservative.Wefeellike,aswecontinuetobroadentheportfolioanddiversifymarketsegments,aswetakethetechnologyintoappliedmarkets,thattheinstalledbasenumbersbetweenusandtheothersupplierswillcertainlyblowthroughthoserangesinfiveyears.
DanArias (Analyst-Citibank):
Okay,great.Thatishelpful.
Marc,maybeaquestionwithabitmoreofatangibleanswer.Dothenewinstrumentshaveanyimpactontheabilitytomaxoutthemanufacturingabsorptionandreallycatchthegrossmarginatthetopendorshouldanyproductionchangestherebeprettyseamless?
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MarcStapley(SVP,CFO):
Anyproductionchangeswouldbeprettyseamless,giventhetypeoftechnologythatisinherentinthe3000and4000.TheXFiveisthesameastheXTeninstrumentobviously.It'ssimilartothecommentsImadelastquarter,thatmanufacturingcapabilitytendstocomeinstepfunction,soyoubuildoutanewfacilityandforwhileitisunder-absorbedandthenyouabsorbitandyoukeepgoinglikethat.Weareataprettystablepointrightnowwiththeabsorptionandthenewinstrumentsshouldjusthelptocontinuetodrivethat.
DanArias (Analyst-Citibank):
Okay,thanksverymuch.
Operator:
RossMuken,EvercoreISI.
RossMuken(Analyst-EvercoreISI):
Goodafternoon,gentlemen.
JayFlat ley(CEO):
Hi,Ross.
RossMuken(Analyst-EvercoreISI):
Iwascurious,Iwantedtojustdiginonacoupleofbigpictureeventsthathappenedoverthelastfewweeksandgetyourthoughts.Becauseitseemslikewearebuildinguptowheresomeofthethingsyouhavebeentalkingaboutintheclinicalmarketarestartingtobecomemoremainstream,soobviouslythePresidentoftheStateoftheUnioncalledouttheprecisionmedicineinitiative.Youhighlightedit.
ButitseemslikethattomeisarecognitionofwherethemarketisgoingandwewillhavetoseewhatthedetailsbehindbutI'mcuriousastowhatsignalyouthinkthatsends?AndthenobviouslyRochealsolargepharmacompany,[JP]paidquiteaheftypriceforsomeoneyoulikelyserveintheoncologyspaceandsoitisanotherpharmarecognizingthevalueofwheresequencingisgoing.
Howdoyouthinkaboutthosethingsintermsofthesemarketswehavebeentalkingaboutforalongtimegettingclosertoamorelarge-scalereality?
JayFlat ley(CEO):
I'dsayat30,000feet,theyareclearlyverystrongsignalsandprobably,Iwouldsay,indicatethingshappeningperhapsevenfasterthanwehadanticipated.I'vetalkedtoalotofinvestorsaboutwhatishappeninginpopulationsequencing,andourexpectationoverthenextfewyearsthattherewillbeanumberofcountriesthatjumpintothisinaveryseriousway.
WefranklythoughttheUSwasbehindintermsofitswillingnesstoconsiderthis.Obviously,itisstillnotanapprovedprojecthereandthereislotsthathastohappentoactuallyfigureoutwhatthisprojectisandwhethertheappropriationgetsapprovedtofundthisproject.
Butthesignalsthatarebeinggivenandhowrapidlytheyhavecome,Ifindextraordinarilyencouragingandvalidatingoftheoverallvaluethatsequencingcanprovideinunderstandinghumanhealthandinmakingdramaticimprovementsinhealthcare,bothintreatmentandineconomics.
Withrespecttopharma,IhavebeenapessimistoverthelastfiveyearsaboutPharmabeginningtoreadoptsequencinginalargeway.Ofcourse,theydidthat15or20yearsagowiththeirverylargesequencinglabs
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withtheprior-generationtechnology,andasweallknow,notmuchcameoutofthoseefforts.Myexpectationwasthatpharmawasgoingtobeprettymuchinthebackroominsofaraslarge-scalesequencing,onlyoutsourcingitwhenneededonaspecificproject,butofcourseusingitinday-to-dayresearchintheirlaboratories.
Whatwe'veseenoverthepast18to24monthsbeginstoindicateotherwise.WesawdeCODEbeingpurchasedbyAmgen,wesawRegeneron'sannouncementoftheirplantosequence100,000exomes,wehavenowseenRocheplantoputtheirclinicalpatientsthrough,atleastwhatwebelieve,toputthosethroughtheFoundationMedicinemethod.
Sowearebeginningtoseepharmacomeintothismarketinaveryrobustwayandwearebeginningtoadjustourownexpectationsthatthismaybeaveryrichmarket.Genentechistheotherexample.TherecentannouncementofGenentechdoingsequencingprojectswithHLI.Obviously,veryimportantdevelopmentsandallbodeswellforadoptionofsequencinginthepharmaindustry.
RossMuken(Analyst-EvercoreISI):
Great.
MaybejustonNIPT,whereareweinthehigh-riskadoption[curve]?Ithinkyousaidingeneral,volumeswereup30%,whichseemslikesequentiallystillaverybignumber.Sohelpusunderstandwhereweareinthat?AndthenwhatarethediscussionslikewithFDAandothersontheaverage-riskpopulation?
JayFlat ley(CEO):
WehavetoseparatebygeographiestotalkaboutNIPTinthatway.IntheUS,Iwouldsayweare--theadoptionissignificantlymorethan50%now,it'sprobablynot75%,soit'sprobablyinbetween.Growthcontinues,morelabsarejumpingintothespace,sowecontinuetobuildoverallvolumeandmomentuminthehigh-riskgroup.
Aswe'vetalkedaboutbefore,average-riskisamuchlargermarket;eventhoughASPswillbelower,thenumberspfsamplesaredramaticallyhigher.Rightnow,thatitisveryclearthat,atleasttheevidencethatwehavepresentedpubliclyinthepaperwepublished,thattheutilityofthismethodisthesameinanaverage-riskpopulation,althoughthefrequencyismuchless.
Soourconclusionfromthat,andIbelievetheFDA'sconclusionwillbethatthistestwillgetusedinaverage-riskanditisforthatreasonthatwewanttoworkverycloselywiththemtomakesurewhateverproductwegetapproved,cansupportwithdataandevidenceandapproval,useofthismethodinaverage-riskpopulation.
Wedon'tknowthetimingofthatandso,asIsaidbefore,weareworkingwiththeFDAtounderstandwhatdoesthatclinicaltrialneedtolooklikeandhowbigarethedatasetsandwhattypeofdatadoweneedtogather,butthatisallwellunderway.
Quitedifferentinothermarkets.IwouldsayintheEU,thepenetrationisvastlyless.Itvariescountrytocountry.Inaggregate,Iwouldguessweareinthe5%range,itmaybeevenless.China,lessthanthat,buthugepotentialandprobablyamarketthatwillcomeonveryquicklyasproductsgetapprovedinChina.Theaverage-riskmarketwillcomeonveryquicklyinChinaandmoreslowlyintheEU.
RossMuken(Analyst-EvercoreISI):
That'ssuperhelpful,andthankyouagain,andcongrats,Rebeccaandguys.
JayFlat ley(CEO):
Thanks,Ross.
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Operator:
AmandaMurphy,WilliamBlair.
AmandaMurphy(Analyst-WilliamBlairandCompany):
Aquestiononpopulationsequencing,again,ifImay?
JayFlat ley(CEO):
Sure.
AmandaMurphy(Analyst-WilliamBlairandCompany):
Obviously,therehasbeenalotoftalkaboutit,butI'mjustcurious,ifyouthinkabouttheinstalledbaseyouhavewiththeXTen,andobviously,nowwiththeXFive.Howdowethinkaboutthatopportunityintermsofincrementalinstrumentdemand?
Obviouslythereisalotofcapacityouttherewithwholegenomesandthere'sclearlyabenefitfromtheconsumablesside.Butisthereawaytothinkaboutpopulationsequencingintermsofincrementaldemandfromtheinstrumentsideversuswhatyouhavealreadyinthebacklog?
JayFlat ley(CEO):
Amanda,Iwouldsay,aswegoforward,particularlyifwe'reoutayearortwo,theusageofanXTenwillgetalittleblurry,intermsofwhatisdoneonapopulationsequencingbasisandwhatisdoneotherwise.
Rightnowwethinkofpopulationsequencingprogramsasonesthataresponsoredbythegovernmentandarereallydirectedtounderstandingthediversityofthepopulation,insomecountriesunderstandingareferencegenomethatislikelyunderrepresentedinareferenceworkthathasbeendonepreviouslyandthenunderstandingthevariationintheirlocalpopulationandtryingtolearnenoughaboutthosevariations,medically,tobeabletoinfluencewhatishappeningclinicallyinthatcountry.
ThatishowwethinkaboutPOPSEQ.IntheUS,thereislotsofsaleswehavemadeofXTensthatarenotthat,butinothercountriestherearesomethatarecertainlyborrowingsamplestreamsfromtheclinicalworkthatisgoingoninthecountry;Garvinbeinganexample.Ifyouthinkaboutthat,couldGarvinbecomeaPOPSEQprojectinthenextfiveyears?Maybetheywill.
Sidraisanotherexample,whereweareinstallinganXTenandthere'sthepossibilitythat,thatmorphsintoapopulationsequencingproject.Ithinkthelinesaregoingtogetalittlebitblurry,butprobablyinthenextyearortwo,wethinkofthesePOPSEQprojectsasdigitallyincrementaltowhatwearedoinginthebaseXTenbusiness.
AmandaMurphy(Analyst-WilliamBlairandCompany):
Gotit.Okay,thanks.
Intermsofthe--afollow-uptoTycho'squestionearlierontheHiSeq4000,3000demand,ifyouwill.Obviously,thereisabenefittogettingthe3000versusthe2500,buthaveyoudoneenough--Iknowitisearly--butenoughmarketresearchatthispointtoassesswhetherthe4000willdriveanincrementalproductcycle?
Obviously,ifyouhavea--you'reincentedtobuythe3000vis-a-visthe2500,butdoyouthinkthattherewillbeadecentamountofHiSeq2000sor2500sthatwillupgradetothe4000,giventheincrementalbenefits?
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JayFlat ley(CEO):
Wearetryingtobecautiousaboutthewordsweusethere,becauseIthinkIknowhowyouareusingthewordupgradeandwegetthatconfusedalittleinternally,too.Justtobecleartoeveryone,youcan'ttakea2500andtrulyupgradeitthewaywethinkaboutupgradinganinstruments.Inasense,youhavetobuyanewone,butitiswhethertheoldonegetslargelyturnedoff.Andsothatisachangeout,andweprobablyneedtocomeupwithabetterwordtodescribeit.
Wedothinkthatwillhappenandthatthe4000and3000incombinationwillbeabigincentivetothat.Wetalkedaboutthatabitwhenweannouncedthe1Tkit,thatthesystemsthatwerecapableofdoing1Twouldcausetheolder2000sinthefieldtobegintoupgradetothenewerversionsofthe2500.Forthosewhodidn'tdothat,they'llskiprightoverthe2500andgotoatleastthe3000ifnotthe4000.
IwouldsaythatIdon'tthinkthe3000/4000createanewcustomersegment.It'snotadifferenttypeofuser,it'sjustvastlybettereconomics.Itisonanewroadmapwithpatternedflowcellsandnewertechnologiesandsototheextentanycustomercangetthemoneytogettoa3000or4000,theywillopttodoit.
AmandaMurphy(Analyst-WilliamBlairandCompany):
Haveyouguysquantifiedwhatthe1Terabaseupgradeoranewproductcyclewasfromahardwareperspective?Iknowyouobviouslyhadthesoftwareupgrade,butdidyou--whatistheupgradecyclefroma2000tothenewTerabasefromahardwareperspective?Didyoueverquantifythat?
JayFlat ley(CEO):
There'sonly--youmeanintermsofnumbersofinstalledbase?
AmandaMurphy(Analyst-WilliamBlairandCompany):
Yes,justcurious.Iknowobviouslyeveryone--ifyoucouldgetthesoftwareupgrade,youwould,butjustintermsofwhoboughtanew2500togettheTerabasereagentkitvis-a-vistheoldinstrumentthatcouldn't(multiplespeakers)?
JayFlat ley(CEO):
Wehaveneverparsedthosenumbersout.Therehasbeenacoupleofanalystswhohavemadeestimatesaboutwhatfractionofourinstalledbaseof2000sand2500scouldnotrunthe1Tkit.Thoseestimateshavebeenmadebutwehaveneversaidwhatthatnumberwas.
AmandaMurphy(Analyst-WilliamBlairandCompany):
Okay.Thanks,guys.
Operator:
BillQuirk,PiperJaffray.
BillQuirk(Analyst-PiperJaffray):
Great,thanks,goodafternoon,everybody.
Firstquestion,Jay,youmentionedinyourpreparedcommentsthatabout30%,Ibelievewasthenumber,oftheinstrumentsinthisquarterwenttoclinicalcustomers.SoI'mcurious,withthenewNGScodesthatwentliveinearlyJanuary,anyfeedbackintermsofthesmoothingorperhaps[less-than-smooth]reimbursementthatsomeofthesecustomersareseeing?Andmaybeyoucouldjusttalktousalittlebitabouthowyouguysarethinkingthatplayingouthereovertheyear?Thanks.
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JayFlat ley(CEO):
Iwouldsayit'salittleearlyforustohaveanyactualevidenceoftheimpactofthecodes.Ihaven'tfromourteamsgottenanydatayetoranydirectfeedbackfromcustomersonbehaviorchangesorchangesinreimbursement,sowedon'treallyhaveanydata.
Obviously,wethinkit'sgoingtobehelpfulandPalmettojustdidanapprovalofanNGScodeaswell,whichwethinkwillbehelpful,buttooearlyforustoknowwhattheimpactisgoingtobeandwhetheritisadirecteffectonvolumesorusageorlabeconomicsyet.
BillQuirk(Analyst-PiperJaffray):
Gotit.
ThenanotheroneonNIPT,[hot]topictoday.Ifwearethinkingaboutadoptiontotheaverage-riskpopulation,obviouslysocietiesendorsingthatisgoingtohelpoutinaprettymeaningfulwayandthere'scertainlysomeestimateskickingaroundwhenACOG[munchupin]andendorsedaverage-risk.Areyouguysexpectingtoseethatthisyear?WehavehearddatesassoonasperhapsApril,May,orroughlyinconjunctionwiththeannualmeeting?
JayFlat ley(CEO):
Wehaveheardthat,aswell.WearenotcountingonthatsoIwouldsayourinternalplansindicateorassumethatitwouldlikelyhappensometimein2016,notin2015.Havingsaidthat,it'spossiblethatitcouldcomeearlier.WeweresurprisedwhenACOGadoptedthehigh-risktestsearlierthanweexpected,sowe'vebeenonaconservativeendofthatcurve,butthat'sthesafeplaceforustobeintermsofourowninternalmodeling,sowe'reassumingsometimein2016.
BillQuirk(Analyst-PiperJaffray):
Gotit,thanks,guys.
Operator:
DanLeonard,Leerink.
DanLeonard(Analyst-LeerinkSwann):
Great,thankyou.WhatisyourassessmentoftheIPlandscapeinliquidbiopsy?IsIPameaningfulfactorsasyouthinkaboutgettingaproductthere?
JayFlat ley(CEO):
It's,fromwhatwehaveseensofar,amuchmorestraightforwardIPlandscapethanwhatwe'veseeninalotofothermarkets,particularlyinNIPT.ClearlytherewillbecompanieswhoclaimtheysomefundamentalIParoundthisashappensalmostineveryapplicationarea.
Whenitallgetssortedout,theseassaymethodsareprettystandard.There'snotalotofrawinventionintheassaymethods,justbeingusedtosequencebloodinaslightlydifferentway,sowethinkit'sarelativelyopenfieldfromanintellectualpropertyperspective.
DanLeonard(Analyst-LeerinkSwann):
Gotit,thankyou.
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Operator:
IsaacRo,GoldmanSachs.
IsaacRo (Analyst-GoldmanSachs):
Thanks.
Justwanttofollowuponliquidbiopsy.Lookingpastthe[ITPs],alsocurioushowyou'relookingatthecompetitivelandscape.Asyoulookatthecompaniesthathaveself-identifiedinthismarket,therearefewthatseemtobemoreorlesspiggybackingyourownNGStechnologyandthenthereareafewothersthathavesomesortofaproprietarychemistry.Doyoufeelthatyouhavemostoftheassetsyouneedtobesuccessful[onago]standalonebasis,inliquidbiopsy?
JayFlat ley(CEO):
Firstoff,I'dsaywearenotplanningtodothisonastandalonebasis.ManyofthecompaniesthathaveannouncedprojectsandbeginningtoshowsomeclinicaldatainNIPT,mostofthemusesequencingastheirunderlyingmethod.Thereareafewotheralternatives,butmostofthemusesequencing,andmostofthemuseourplatform.
Wewillcontinuetoencouragethat.Thosearegoingtobegreatcustomersforusbecauseremember,intheUS,eventhoughwearedevelopingourownmethod,wedon'thavetheabilitytogoouttothelabsandtoteachthoselabshowtousethatmethodbecauseofthehomebrewrule.
SointheUS,wewillgothroughtheFDAandtrytogetanimprovedtest,wewillrunanLDTasnecessarytogatherdatatobuildclinicalevidence,andencouragetheoverallmarkettogrowwithlotsofdifferentmethodshere.
It'sgoingtobeadiversesetofmethods,webelieve,forNIPT--forliquidbiopsy.There'sanumberofdifferentwaystogoaboutit.Therewillbesomecompanieswhochoosetohaveverytargetedteststhathavelimitedindications.Therewillbeothersthatgoaftermuchmoreuniversalmethods.Ouroptionthatwehavechosenistogotowardthemoreuniversaltest,eventhoughwewillmarchthroughsomemoretargetedcollectionsofvarianceontheway.
IsaacRo (Analyst-GoldmanSachs):
Gotit.Thatmakesense.Thanks.
Thenjustontheforensicsplatform,that'samarketwhereIthinkofthecustomersasbeinginmanycaseseithergovernment-fundedorcrimelabsandthelike,sojustmaybeifyoucouldhelpusunderstandyourgo-to-marketstrategythere,whoyourinitialtargetcustomersareandwhatkindofchannelinvestmentyouwouldmake?Thanksabunch.
JayFlat ley(CEO):
Francis,youwanttotakethat?
FrancisdeSouza (President):
Sure,youareright.Ourapproachactuallyfromacommercialperspectiveistotakewhatwebelieveisasignificantlysuperiorofferinginthismarketthroughourspecialistchannelthatoverlaysonoursalesforceandtargetsexactlythekindoflabsthatyouweretalkingabout.Wemadetheannouncementacoupleofweeksagoandweexpecttobeoutinthefieldthisquarterandthroughtherestoftheyear,targetingthoselabs.
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IsaacRo (Analyst-GoldmanSachs):
Thanks.
Operator:
SteveBeuchaw.
SteveBeuchaw(Analyst-MorganStanley):
Hi,goodafternoon,andthanksfortakingthequestions.
Iwonder,Jay,ifyoucouldtaketheapproachthatyouhavebeenusinginNIPTwiththereviewthatMyraqahasgivenoftheapproachandmaybegiveusthatsamelensonyourapproachinclinicalandoncology.WhathasyourworkwithMyraqataughtyouabouthowtoapproachthatmarket?
JayFlat ley(CEO):
I'dsaythere'sacoupleofthings.OneisthatwewillbegoingforCEapprovalinEuropefasterthanwemighthaveotherwise.That'sacriticalstepforustotakeandit'sonethatisvastlyeasiertotakethanaFDAapproval.Soyouwillseeusdothatmuchmoreaggressivelythanperhapswehavedonehistorically.
ThesecondthingIthinkyou'llseeusdothatisabitofashiftiswewillgofor,intheUS,foropenplatformapprovalfirst.Thatwillallowotherstoputtheirassaymethodsonourplatformsbeforewegetaspecificassaymethodofourownapproved.SothosearetwostrategicchangesthatcameoutofthereviewbyMyraqathatapplyacrosstheboard.
FrancisdeSouza (President):
TheotherthingI'daddis,look,wearereallyexcitedabouttheworkgoingonintheActionableGenomeConsortium,intermsofsettingthestandardsforthesampleandtargetprepforthereporting,theinformatics,andwehaveregulatorybodiesthataresittinginasinterestedobserversintheAGCprocessandarelookingatwhattheAGCwillpublish.Welikethewaythatprocessisplayingoutandyoucanexpectustocontinuetodomoreofthatkindofactivity.
SteveBeuchaw(Analyst-MorganStanley):
Asyouputitalltogether,howdoyouthinkaboutthegrowthintheoncologybusinessforward,fromaverystrong2014?
JayFlat ley(CEO):
Wearequiteoptimisticaboutit.EvenwithoutActionableGenomeandliquidbiopsy,ourcoreoncologybusinessisgrowingverynicely,atleasttheCorporategrowthrateifnotabithigher.Sotherecontinuestobeverystrongdemand.IfyoulookatafractionofNextSeqswearesellingintooncology,itishigh.
Sothere'sjustgeneralpullnowintothesetypesofapplicationsincreasinglybroadly,soit'snotjustthebigcancercentersanymore.Andthenyoulayerontopofthatthestep-functionswethinkwecouldprovidewiththeActionableGenomepanelandwithasuccessfulliquidbiopsyproduct,thatputsinflectionpointsinthecurve,butthoseinflectionpointsarestillawaysout.
SteveBeuchaw(Analyst-MorganStanley):
Perfect,thankssomuch,everyone.
Operator:
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
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JackMeehan,Barclays.
RebeccaChambers (SeniorDirector-IR):
Youcanmoveon.
Operator:
JeffElliott,Baird.
Jef f Ellio t t (Analyst-RobertW.BairdandCompany):
Thanksforthequestion.
Jay,I'mwondering,sinceit'sbeenaboutayearsinceyoulaunchedtheXTen,canyoureflectontheexperienceyourcustomershavehadinthingslikegatheringsamples,sampleprep,managingthedata?Andthenasafollow-on,anychangeinthoughtonopeninguptoothersamplesbesideswholehumangenomesontheXTen?
JayFlat ley(CEO):
There'sacoupleofobservationsthere.Onethatwehavehighlightedpreviouslyisthat,clearly,wearesellingthistechnologymuchmorebroadlythanouroriginalassumptions,andasaresultofthat,wehaveagreaterfractionofourcustomersofXTensthatneedtobringupnewcapabilitiesthatperhapstheydidn'thavebefore.
It'sonethingifyouareTheBroadandyouknowhowtosequencemassivenumbersofsamplesandyouhavepipelinesinplace,informaticsinplaceand400,000samplesinthefreezer.ThatisoneextremeandclearlytheycameuptospeedontheXTenextraordinarilyfast.
Buttherearelotsofothercustomersthatneedtobuildoutbrandnewsamplepreppipelinesandthattakessometime.Informaticsisachallengeandthatpartisachallengeforeverybody,evenincludingTheBroad,tobeabletoanalyzethevastnumberofsamplesthatcanbecreatedbytheXTen.
ButclearlynoonewouldworkonthatproblemunlesswehadtheXTeninthemarket,soit'sveryimportantthatwedeliveredthistechnologyandthat'sreallycatalyzingtheworldtobegintoworkontheproblemsofhowyouanalyzetensofthousandsofwholegenomesatonetime.
Theinformaticswillkeepup,althoughittendstolag.Thereisalwaysaconcern,andIreflectbackthatwhenwelaunchedourfirst300kgenotypingchip,everybodywassoworriedaboutthechallengeofanalyzingallthatdata.Nowthat'sapittancecomparedtowhatwecandoonanXTen.SothatcountsforthespectrumofadoptionratesorusageratesonXTen.
SowedohavetheabilitynowtoanalyzeinternallywhatfractionofthetimeeachoftheseinstrumentsisusedbytheXTencustomersandthatfallsacrossaverybroadspectrumandit'sfortheexactreasonsthatwehavejustdiscussed.
I'msorry--youhadasecondparttoyourquestion?
FrancisdeSouza (President):
The[locations]openingupforotherapplications?
JayFlat ley(CEO):
Rightnow,wehavenoplantoopentheapplications.Today,youshouldthinkoftheXtechnologyasbeing
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
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wholehumangenome.Atsomepointinthefuture,wemayreconsiderthatdecision,butasoftoday,it'sawholegenomesequencingbox.
Jef f Ellio t t (Analyst-RobertW.BairdandCompany):
Great,thankyou.
Operator:
BryanBrokmeier,MaximGroup.
BryanBrokmeier(Analyst-MaximGroup):
Thanksfortakingthequestions.YoupreviouslyalludedtoapaceofPMAsubmissionsthattheFDAhasneverseenbeforefromtheentiremarketasawhole.HaveyouhaddiscussionswiththeFDAandwhatistheirfeedbackthenonyourplansandtheirabilitytohandleit?
JayFlat ley(CEO):
Iamsorry.Idon'tunderstandthefirstpartofthat.ThatwasthesheernumberofPMAsthattheFDAdealswith?
BryanBrokmeier(Analyst-MaximGroup):
Backaboutafewquartersago,youtalkedabouttheFDA,andtheyusuallyonlyapprovetwoorthreePMAsperyearandyouareplanningtobringmoresubmissionstothemthantheyhaveseenintheentiremarket.SoIwaswonderingiftheyhavehadanyfeedbackontheirabilitytohandlethat?
JayFlat ley(CEO):
Yes.Idon'tthinkthat'sgoingtobeaconstraintattheFDA.Thedatasetsthatweareprovidinghere,theyknowhowtoreviewthemprocedurally,soIdon'tthinkthere'snecessarilyachallengearoundthat.Thebiggerchallengehereistheintellectualleapeveryoneismakingtoanewgenerationofapprovedproduct,onewherethereisnotaone-to-onecorrelationanymorebetweenwhatcomesinandwhatpossibleresultyoucouldconcludefromthedataset.
AndthatisthebigleapthatneedstobemadeandwhereweandtheFDAneedtoworktogethertofigurehowdoyouactuallyvalidatethesenewproducts.Theytrulyareadifferentclassthanhaveeverbeenapprovedbefore,andgettingoverthathurdleandunderstandingandperhapsevolvingwhateverwedecidetodocollectivelythere,iswherethebigchallengesis,asopposedtojusthandlingthesheernumberofsubmissions.
BryanBrokmeier(Analyst-MaximGroup):
Thanks,Jay.
ThesecondquestionisforMarc.Grossmarginshaverecentlybenefitedbythehighermarginsontheinstrumentsyou'veintroducedinthelastyear.Arethemarginsontheinstrumentsyoujustrecentlyannouncedatsimilarlevelsastheinstrumentslastyear?Andwhatimpactwilltheprogram--thetrade-inprogramthatyoutalkedabouttodayhaveongrossmargins?
MarcStapley(SVP,CFO):
Theimpactofthetrade-inprogramyouhaveseenmarginallyinthefourthquarter.We'llunwindthatthroughQ1andQ2asthatprogramwrapsupinthefirsthalf.
CompanyName:IlluminaIncCompanyTicker:ILMNSector:HealthCare
Industry:DrugsEventDescription:Q4 2014 EarningsCall
©2014TheStreet,Inc.AllRightsReserved Page22of 22
Onthenewinstruments,Iwouldthinkofthoseasbeingsimilargrossmarginstotheinstrumentsthatwecurrentlyhave,withtheexceptionofobviouslytheXFiveisahigherpriceperunitthantheXTen,soobviouslythereisaslightlybettergrossmarginontheXFive.
BryanBrokmeier(Analyst-MaximGroup):
Okay,thanksalot.
Operator:
IwouldnowliketoturnthecallovertoRebeccaChambersforanyclosingremarks.
RebeccaChambers (SeniorDirector-IR):
Thankyou.
Asreminder,areplayofthiscallwillbeavailableasawebcastintheInvestorssectionofourWebsite,aswellasthroughthedial-ininstructionscontainedintoday'searningsrelease.Thankyouforjoiningustoday.Thisconcludesourcall,andwelookforwardtoournextupdatefollowingthecloseofthefirstfiscalquarter.
Operator:
Ladiesandgentlemen,thatconcludestoday'sconference.Thankyouforyourparticipation.Youmaynowdisconnect.
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