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Illumina makes Q3 recoveries, looks to population genomics for revenue growth

After a shaky second quarter, Illumina Inc. appeared to make a gradual recovery in its third-quarter earnings, but executive comments on its earnings call suggest the company is banking on several population genome sequencing initiatives to drive revenue growth.

The gene sequencing giant raised EPS guidance, but it did not quite reach original expectations posted at the beginning of the year. San Diego-based Illumina was trading down by about 5.2% to $299.05 after market close, as of 5:55 p.m. ET.

Illumina continued to see direct-to-consumer product slowdowns, with array consumables down 10% year over year.

Array services were down 32% year over year, and microarrays declined 32% in the quarter. Illumina's array systems analyze genetic variation.

Illumina's China revenues declined 7% year over year, though CFO Sam Samad said during the Oct. 24 earnings call that the same period last year did see some pull-forward stocking activity due to anticipated tariffs. When accounting for the stocking, third-quarter China performance was down just 1%, he said.

Samad also said the clinical side of the business is very strong in China, such as oncology testing, noninvasive prenatal testing and in vitro diagnostic testing.

The weakness came from declining funding for research, down by about 10% year over year, according to Samad.

"It's a two-part story," Samad said.

Pointing to positives

Nevertheless, NovaSeq, the company's flagship sequencer, saw the second-highest shipping quarter ever as Illumina customers continued to convert to NovaSeq from less powerful sequencers.

NovaSeq, moving into its fourth year of launch in 2020, demonstrates the "broad acceptability" of high-intensity sequencing applications, CEO Francis deSouza said.

SNL Image

Illumina CEO Francis deSouza
Source: Illumina

DeSouza also emphasized the promise of genomics in oncology, particularly as some of Illumina's oncology panels such as TruSight Oncology 500 continue gaining insurance coverage.

"Genomics will be included in the standard of care over time," deSouza said, speaking to cancer and broader healthcare.

In that vein, population genome sequencing initiatives such as the National Institutes of Health's All of Us program, the Sanger Institute's Biobank initiative in the U.K. and the U.K.'s separate National Health Systems program, are beginning to take off — all expected to contribute to Illumina's revenues, executives said.

The U.K. Biobank, aiming to sequence 500,000 genomes in total, commenced sequencing of 10,000 genomes per month as of Sept. 30, Leerink analyst Puneet Souda reported in a note the same day. According to deSouza, the Biobank will be a fourth-quarter revenue driver, carrying over to 2020 as well.

The All of Us program, having faced multiple delays due to regulatory discussions, is expected to be a 2020 revenue driver, but not so much for 2019, deSouza clarified.

The NHS program, looking to sequence 100,000 genomes annually over the next five years, will also begin in 2020.

Despite the executives' emphasis on population sequencing revenues and other partnerships with QIAGEN NV and Adaptive Biotechnologies Corp., several analysts on the call voiced some concerns about the elasticity of demand "that is the central thesis to Illumina," as Leerink's Souda put it during the question-and-answer session.

In particular, Souda pointed out the apparent lack of new instrument launches and the consequent absence of future catalysts besides the population sequencing programs.

PacBio updates

Illumina's $1.2 billion acquisition of fellow sequencer Pacific Biosciences, the closing of which was delayed to Dec. 31 and could be extended even further to March 2020, will involve discussions with the U.K.'s Competition and Markets Authority in coming weeks, deSouza said.

The CMA, as well as the U.S. Federal Trade Commission, had referred the deal for further reviews. Illumina is currently reviewing documents from the CMA.

"We continue to believe that this acquisition is pro-competitive and in the best interest of customers and the genomics industry," deSouza said.