Good day, ladies and gentlemen, and welcome to the Third Quarter 2020 Illumina Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speakers' presentation, there will be a question-and-answer session. Thank you. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Juliet Cunningham, VP, Illumina Investor Relations. Please go ahead.

Good afternoon everyone and thanks for joining us for our third quarter 2020 results conference call. During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity, after which we will host a question-and-answer session. If you've not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Francis deSouza, President and Chief Executive Officer and Sam Samad, Chief Financial Officer. Francis will share an update on our business and Sam will review our financial results. Similar to last quarter, we are hosting our call from a number of different locations. So please bear with us if there are any technical issues or pauses. This call is being recorded and the audio portion will be archived in the Investors Section of our website. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the document that Illumina files with the Securities and Exchange Commission including Illumina's most recent Forms 10-Q and 10-K. With that, I'll turn the call over to Francis.

Thank you, Juliet. Good afternoon everyone and thank you for joining us today. We saw a strong rebound in our business in the third quarter with a faster recovery than we expected in both our clinical and research customers. Total revenue for the third quarter was $794 million, up 26% sequentially and down 12% compared to the prior year period. I'll share that the quarter highlight and Sam will provide more detailed financials. Sequencing revenue grew 25% compared to the second quarter of 2020. Sequencing consumables grew 29% sequentially with strength across our high, mid and low throughput product portfolio. NextSeq momentum continued to build. With mid throughput consumables growing both sequentially and 3% year-over-year, and we expect continued growth in the fourth quarter. Sequencing instruments also outperformed expectations with revenue up 24% sequentially. This growth was primarily driven by increased shipments of NovaSeq and NextSeq platforms. NovaSeq purchases have rebounded nicely from Q1 and some customers delaying purchases as shelter-in-place policies took effect. We are pleased with the sequential growth in NovaSeq shipments in each quarter since Q1. We're entering the fourth quarter with a strong NovaSeq pipeline and expect this sequential growth to continue in Q4. In addition, we had another successful quarter for our mid throughput portfolio with both NextSeq 2000 and NextSeq 550 exceeding our expectations. Strong demand for these flexible sequencers led to record mid throughput shipments in the third quarter. We're especially pleased with the success of the NextSeq 2000 launch reflecting positive customer feedback and demand. Approximately one-third of the NextSeq 2000 placements are coming from new-to-Illumina customers. Consistent with our expectations, we've seen little cannibalization of NovaSeq conversions among the remaining HiSeq customers. Sequencing service and other revenue grew 9% sequentially and was 28% lower compared to the prior year, due to one-time IVD licensing and development revenue of over $30 million in the third quarter of last year. Total Microarray revenue of $86 million grew 28% sequentially as direct-to-consumer customers and other applications began recovering from pandemic-related headwinds. Turning to our customer segments. We saw solid improvement in both clinical and research activity. As a reminder, we track sequencing run rate as an indicator of general activity. Run volumes are based on sampling and do not directly correlate with revenue. The intent of providing this metric is to help investors understand customer sequencing activity. Clinical sequencing run volumes increased from an average of 84% in the second quarter to 96% during the third quarter compared to pre-pandemic levels. In oncology, we're encouraged by signs pointing to continued adoption of NGS in cancer treatment. The European Society for Medical Oncology or ESMO became the first scientific society to issue recommendations for the use of NGS in oncology. Depending on the cancer type that society recommends NGS for large multi-gene panels for the determination of tumor mutation burden and to screen patients for clinical trials. Today, TSO 500, which is for research use only, provides comprehensive genomic profiling and has been adopted by approximately 250 customers. We're excited to release a CE-IVD-marked TSO comprehensive assay in 2021 labs can follow ESMO guidelines and continue to improve cancer patient outcomes. Growing payer options will continue to broaden the availability of these tests. Last month, Aetna covering 19 million lives, announced coverage for large panel comprehensive genomic profiling for both solid and liquid tumors, including testing for TMB. We're also encouraged by the increasing availability and adoption of NGS-based liquid biopsy tests. The recent FDA approval for Guardant360 and FoundationOne Liquid CDx demonstrate the clinical utility of these technologies that detect cell-free DNA from the tumor in the blood and can provide comprehensive genomic profiling and tumor tissue if not available. Liquid biopsy panels like these broaden access to more patients who can benefit from NGS in their cancer treatment. Reproductive health showed strength in the quarter, growing sequentially and year-over-year. In fact, during the third quarter, reproductive health averaged over 100% of its pre-pandemic run rate. We expect sustained growth as reimbursement prospects have never looked more promising. Recently, ACOG updated its guidance to recommend that NIPT be made available to all pregnant women, regardless of maternal age or baseline risk. This is a major milestone, and we expect payers to continue to follow ACOG'S guidance, adding to the already 130 million-plus lives covered for average risk in the U.S. Centene, for example, recently aligned its guidelines, adding average risk coverage to an additional 23 million lives in the U.S. Centene is also the largest Medicaid managed care organization in the U.S., meaning this coverage decision will bring NIPT as an option to more medically underserved areas and populations. In genetic disease testing, physicians, insurance companies, and governments around the globe are increasingly adopting sequencing to diagnose children suspected of having genetic conditions. We're seeing solid progress on the reimbursement front. Payer adoption in the U.S. continues to grow, with more than double the lives covered for whole genome sequencing than at the start of the year. Australia recently announced that it will reimburse whole exome or genome sequencing to identify the genetic cause of intellectual disabilities. These positive developments give us confidence and sustained long-term growth in this under-penetrated market. Turning to research, sequencing runs show continued improvement, increasing from an average of 65% in the second quarter to 82% in the third quarter, compared to its pre-pandemic run volumes. We're encouraged to see researchers returning to their labs and reopening, and this level of improvement exceeded our expectations. Within research, we're seeing the role of NGS take shape in infectious disease. We believe the most likely near-term use case for sequencing is in research and surveillance for projects like Australia's first national COVID-19 tracking system, which aims to sequence the virus genomes of all positive COVID-19 tests in Australia and track COVID-19 using genomics across the country. NIH is also increasing its funding for understanding COVID-19 and the transmission pathway using genomic testing. We continue to believe COVID-19 testing will primarily be served by PCR and antigen tests, with NGS providing supplemental testing capacity. As such, we're not factoring in a material contribution to revenue in the fourth quarter from COVID-19 testing. On the population genomics front, we're seeing promising signs of progress. All of Us received its IDE approval from the FDA in the second quarter, and as expected, samples started to flow from the Biobank to partner genome centers. We expect the project to ramp in the fourth quarter and into 2021. During the third quarter, sequencing for the UK Biobank continued, and we expect levels to gradually return to normal and sequencing to continue into 2021. We expect whole genome sequencing services for the NHS genomic medicine service to commence later this quarter. Given the NHS's current focus on COVID, we expect this program to gradually ramp over the next few quarters. Perhaps one of the most resilient pop-gen programs in the face of the pandemic has been the Million Veteran Program or MVP. The project aims to provide insight on how genetics, lifestyle, and military exposures affect health and wellness and has recently expanded its targeted enrollment from 1 million to 2 million veterans. The U.S. Department of Veterans Affairs through a sequencing partner expects to cross the hundred thousand whole genome milestone before the end of the year. We believe these and other initiatives will expand our markets and create exciting new opportunities for Illumina. We are committed to continuing to lead in innovation with new product launches to support the markets and customers we serve, including NovaSeq 6000 version 1.5 reagents, which were launched during the third quarter. This release offers increased shelf life, improved quality scores, longer indices, and most importantly, it makes the $600 genome more broadly available to help smaller labs be successful and provides additional incentives for labs to upgrade from HiSeq to NovaSeq. NovaSeq 6000 version 1.5 reagents have been extremely well received by our customers. For example, the Princess Maximus Center, the largest national pediatric oncology center in Europe was outsourcing its genome sequencing to a collaborator. But with the new reagents, they were able to purchase a NovaSeq and can now start to perform testing in-house, meaning potentially care-altering genomic information will reach children with cancer faster and be performed closer to the patient. The longer read lines, combined with high throughput scale, enable the Canadian biotech company to adopt the NovaSeq 6000 for the development of antibody products for potential COVID-19 therapy. We're preparing to launch NextSeq 1000 this quarter. NextSeq 1000 enables lower throughput customers to adopt our newest platform as an entry point with the ability to field upgrade during the NextSeq upgrade cycle. We're also launching the P3 flow cells this quarter. Early Access P3 customers, including academic core labs, are already using the flow cell for routine sequencing methods in mid-sized research projects to enable faster turnaround times. Other customers are using P3 to develop workflows in single cell epigenetics and spatial transcriptomics. These are examples of how we continue to execute on our current and future plans throughout these challenging times to advance our mission and create long-term shareholder value. Now, I will hand the call over to Sam to discuss the third quarter financials.

Thanks, Francis. As discussed, third quarter 2020 revenue was $794 million, a 12% decline year-over-year, but a 26% increase compared to the second quarter of 2020. While the global pandemic continued to impact our business, we saw encouraging signs of recovery within both clinical and research customers. Sequencing consumables revenue of $500 million was up 29% sequentially, and down 5% compared to the prior year period. Quarter-over-quarter growth of $113 million reflected significant improvement across high, mid, and low throughput platforms. With NovaSeq flow-through returning to over $1 million per system per year. Our mid-throughput sequencing consumables grew in the quarter versus the same period last year. Total sequencing system revenue of $109 million was ahead of our expectations with both NovaSeq and our mid-throughput platforms exceeding our expectations at the start of the quarter. The third quarter was also a record quarter for mid-throughput shipments driven by customer demand for NextSeq 2000 and the NextSeq 550 Dx platform. In fact, NextSeq shipments represented over 40% of NextSeq 550 shipments year-to-date. Since 2013, Illumina has shipped over 1,000 Dx instruments reflecting the growing clinical nature of our customer base. Sequencing service and other revenue of $99 million was lower compared to the third quarter of 2019. Total sequencing revenue was $708 million and represented 89% of total revenue. Finally, total microarray revenue of $86 million was down 16% from the third quarter of 2019, reflecting lower consumables and services revenue, primarily driven by COVID-19 related headwinds. Turning to the regions, America's revenue of $436 million was ahead of expectations and grew over $130 or 30% compared to the second quarter of 2020. Sequential growth was driven by both research and clinical customers as labs continued to reopen and clinical activity increased. In fact, clinical sequencing consumables grew modestly compared to the prior year period, as demand started to recover after delays in testing in the second quarter. EMEA revenue of $230 million was up $45 million compared to the second quarter of 2020, with strength in sequencing consumables, which grew compared to the third quarter of 2019, driven by a strong rebound in both clinical and research customers. China revenue grew sequentially to $83 million driven by strength in instrument placements. APJ revenue was roughly flat year-over-year at $62 million and increased $11 million compared to the second quarter of 2020, with NIPT helping to lead the recovery with sequential and year-over-year growth. Moving through the P&L, I will highlight non-GAAP results that include stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release, and the supplementary data available on our website. Please note that all subsequent references to net income and earnings per share refer to the results attributable to Illumina shareholders. Non-GAAP gross margin of 67.4% was lower than expected on both a year-over-year and sequential basis. The year-over-year decline was driven by IVD partnership revenue in the third quarter of 2019 not repeating this year and lower volume and higher freight costs associated with the pandemic. Non-GAAP operating expenses of $365 million were higher compared to the second quarter of 2020 and the same quarter last year. Sequential growth was driven as expected by an increase in R&D project spending and higher compensation expense. Compared to the third quarter of 2019, operating expenses were higher primarily due to compensation-related expenses and increased project spend partially offset by decreased travel. Non-GAAP operating margin was 21.4%, up from 15.8% last quarter. The non-GAAP tax rate of 14.8% was lower compared to last quarter and prior year, due to discrete tax benefits related to prior year return adjustments and released reserve effects. For the third quarter of 2020 gap net income was $179 million or $1.21 per diluted share. And non-GAAP net income was $150 million or $1.02 per diluted share. Other income was the main driver for the difference between GAAP and non-GAAP net income due to net gains from mark-to-market adjustments on our strategic investments primarily from our marketable equity securities. Additionally, in the third quarter, cash flow from operations was $152 million, capital expenditures were $48 million and free cash flow of $105 million. DS0 of 53 days compared to 55 days last quarter, in part due to increased collection. We repurchased $125 million of common stock in the third quarter, with $295 million remaining for repurchase under our current plan. We ended the quarter with approximately $3.3 billion in cash, cash equivalents, and short-term investments. Our weighted average diluted share count for the quarter was approximately $148 million. As we continue to navigate this pandemic, there are still uncertainties around the virus resurgence and rate of recovery. And therefore, we will not provide guidance for the remainder of the year. Additionally, we are closely monitoring developments in the pandemic given the risk of new shutdowns in the U.S. and Europe. In the fourth quarter, we expect that sequencing run volumes will continue to improve modestly for clinical and research customers from the 96% and 82% levels, respectively, in the third quarter. Again, we caution that this does not directly correlate to revenue. But data from the third quarter suggests customers are steadily returning to their labs, which will lead to increased activity. Consistent with the third quarter, we expect fourth quarter sequential growth across all regions with China and APJ showing flat to modest growth year-over-year. For the fourth quarter of 2020, we currently expect continued sequential improvements in revenue resulting from sequencing consumables being up modestly on a sequential basis as clinical and research activity continues to gradually improve. Sequencing instruments increasing sequentially, and the fourth quarter is expected to be the strongest quarter of the year for instrument placement. Sequencing service and other flat sequentially and microarrays up modestly on a sequential basis as we continue to see a gradual recovery in direct-to-consumer and genotyping applications. For the rest of the P&L, we expect a sequential decline in non-GAAP gross margin in part driven by product mix with higher contribution from instrument sales. Sequential increase in non-GAAP operating expenses primarily driven by R&D project-related expenses, compensation-related expenses, and an extra week in the fourth quarter compared to the prior quarter and prior year. Non-GAAP EPS is to be roughly flat compared to the third quarter of 2020, reflecting revenue improvements offset by lower gross margins and a sequential increase in operating and tax expenses. With that, I'll hand the call back over to Francis for some closing remarks.

Thanks, Sam. As the global leader for sequencing platforms and consumables, we've seen our products enable groundbreaking research programs and transformative clinical tests that have the potential to shift the paradigm in patient care. One of our largest opportunities for patient impact and revenue potential for years to come, is the ability for NGS to detect cancer early. Last month, we announced a definitive agreement to acquire GRAIL, and we expect the acquisition to close in the second half of 2021. We believe our planned acquisition of GRAIL will accelerate a new era of early cancer detection, transforming cancer survivability, and opening up the largest clinical application of genomics we've seen. We look forward to welcoming our GRAIL colleagues to Illumina when the acquisition closes. Upon close, we expect to operate GRAIL as a division within Illumina. We remain committed to supporting all of Illumina's customers and ensuring that innovators who wish to develop NGS-based tests have continued access to our technologies. To conclude, the recovery of our business accelerated in the third quarter with significant sequencing consumables revenue growth compared to the second quarter of 2020. And we expect continued consumables growth in the fourth quarter. Importantly, we're also making good progress integrating genomics into the standard of care in oncology therapies, selection, NIPT, and genetic disease testing. And most importantly, we believe that we're laying a strong foundation for Illumina's near and long-term growth. With that, we'll open the call up to Q&A.

We will pause briefly to organize the Q&A session. The first question comes from Doug Schenkel at Cowen. Your line is open.

Good afternoon, guys. And thank you for taking the questions. The quarter was clearly better than most expected. I think you did even better than you guys probably thought in a lot of instances. I'm just wondering if you have a sense for how much of this was catch-up versus reflecting a new base to build off of moving forward? Based on your prepared remarks on Q4, both you Sam as well as you Francis, it does seem like this is kind of a new base to build off of given the momentum you've described heading into Q4. Is that fair?

Hi, Doug. Yes. I think that's fair. If we look at how this quarter played out, it certainly played out better than we expected based on how the first few weeks of the quarter were looking. So what we saw over the course of the quarter was an acceleration in the recovery in terms of the sequencing activity in both our clinical and research customers. And so, as we exited the quarter, I think we're at a new baseline that we will keep going into Q4. So I think it's fair to say that the recovery accelerated to create a new baseline for us going forward.

Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open.

Hey, thanks. I want to hit on two things. Just the elasticity on the consumable pricing cut. You highlighted a couple examples, for instance of customers that have come forward on the $600 genome and used it as a reason to buy NovaSeq. But I'm just curious as we think ahead into the next year, how much incremental demand do you think that that will drive? And to what degree will it catalyze some of the projects that you hoped it would? And then on the instrument side, instruments are still down 23%. I'm just wondering if you could comment a little bit on when you think they're really going to get back to grow?

Yes, sure. So let me take both of those questions. So first, around the elasticity point associated with the launch of Version 1.5 Reagent. So what Version 1.5 aims to do, and we saw the effect in the quarter was really catalyze some of the smaller core labs by giving them access to the $600 genome. The larger labs already had access to the $600 genome. So this was really a release targeted at the smaller core labs. And the intent is to do two things. One, to unlock the elasticity and that part of the market. And so, we saw customers that were thinking about bigger projects. We saw customers that were moving to insource. And I talked about an example of that in the prepared remarks. The other thing this release was intended to do was catalyze an upgrade cycle in that segment of the market, the smaller core labs. And so, we started to see examples of customers that were either on older instruments or didn't have sequencers. And because of this release, they were able to buy a NovaSeq. Both of those dynamics, so catalyzing the elasticity of demand in terms of bigger projects, as well as driving an upgrade cycle are dynamics we expect to continue to play out into Q4 and going into next year. And typically when we release a new price point into the market, a lower price point, initially there is a bit of a headwind. In this case, though, we expect it to be very short and that's how it's playing out where very quickly we're starting to see both of those positive dynamics start to play out. The second question you talked about was around instruments, and maybe I'll start and Sam, you can add to it. I talked a little bit in the prepared remarks that we saw really good activity from an instrument perspective. We were really pleased that throughout the course of the year, Q2, we saw an increase in NovaSeq shipments compared to Q1, Q3 was bigger than Q2. And so we continue to see growth in NovaSeq shipments planned over the course of this year from the base of Q1, and we saw strong demand in the mid-throughput instruments too. Maybe Sam, I'll turn it over to you to provide more color.

Yes. I would say, in fact, we've been pleased with the sequencing instrument performance both in Q3 and the resilience that we've seen through the pandemic. We would expect that there would be year-over-year declines, especially given the pandemic, given some pause on instrument purchases. But as we look towards Q4, we're expecting growth in instruments; our strongest quarter of the year. We're expecting growth in terms of NovaSeq sequentially as well. And when I say growth in Q4, I mean sequentially in terms of instrument revenues. And then the pipeline looks really strong for both NextSeq 2000 and for NovaSeq.

Your next question comes from the line of Derik De Bruin with Bank of America. Your line is open.

Hi, good afternoon. A couple of questions. I think the first one, obviously, there's been a big ramp in the operating expense in the second half of the year. As we think about going forward, is this something we should think about rolling into 2021. But even higher, as some of the T&E comes back in, the travel comes back in? And I guess some of the negative questions. The NIPT space, can you give us a sense of how many women that were covered under high risk actually were taking advantage? I mean, the women that were eligible for doing high risk, how many actually went into NIPT testing? And the reason why I asked is I'm just trying to get a sense of what the penetration would be for average risk manager sort of expanding coverage. Just trying to get some feel for the dynamics and how we can think about the NIPT business expanding? Thank you.

Yes. Maybe I'll start and then Sam can add some color too. In terms of operating expenses, our philosophy over the course of the year has been to review our operating expenses very closely. And one of the things we want to do is make sure we continue to protect the high-priority things that we were working on. So that includes our rich innovation pipeline. And so we've protected our projects associated with upcoming products, as well as some long-term investments in the business. So we've protected those. But we've looked for other areas where we could make savings, some of those sort of naturally played out over the course of the pandemic in the form of reduced travel. For example, I think some of those, you're right, we'll come back next year. And so Sam will comment learn more about that. In terms of NIPT, obviously, it's a very regional story. But in the U.S. for example, you have a reasonably good penetration in terms of the women who are eligible for NIPT going to get it. So the majority of women who are eligible for the test do get it as part of their pregnancy. And so, the opening up of that market in the average risk segment does represent meaningful upside in terms of the actual demand for the test.

Yes, Derik, regarding operating expenses, I would like to add a couple of points, and I appreciate the question. First, we have been very focused and diligent in managing our operating expenses while ensuring that our investment in innovation and our R&D pipeline remain unaffected. For the first three quarters of the year, up until the end of Q3, we were approximately $150 million under our internal budget for operating expenses, which is about 10% below expectations. As we look ahead, some expenses will start to increase, particularly as employees return to the lab and R&D projects ramp up. We also anticipate that travel expenses will rise as the pandemic situation improves. Overall, we have been very disciplined in managing our expenses thus far this year.

Your next question comes from the line of Puneet Souda with SVB Leerink. Your line is open.

Hi, Francis. Thanks. And Sam, I appreciate your comments about Q4. My first question is regarding the recent lockdowns in France and Europe. I am curious if you have accounted for these developments in your expectations for the fourth quarter. Additionally, do you think customers in Europe will be more adaptable this time around in managing their research and diagnostic sequencing operations compared to before? I would like to hear your perspective on this. Given that the sequencing run rates you mentioned earlier are at 96% of pre-pandemic levels, is it possible we might see a different standard, and is this reflected in your guidance? For my second question about GRAIL, there has been a lot of discussion recently regarding Illumina's acquisition of GRAIL in light of another multi-cancer liquid biopsy acquisition this week. While I understand these acquisitions are pre-revenue, it seems that GRAIL is valued much higher than Thrive. Could you provide insight into the overall market opportunity of the pre-pen cancer test or any technical advantages of the gallery, scale of studies, or anything else that contributes to this higher valuation? Thank you.

Yes. Thanks, Puneet. So I will start with your question around the potential restrictions in Europe, maybe even the U.S. As we mentioned in the prepared remarks, we're monitoring this closely. Obviously, we all want to see the pandemic get under control. But there are definitely some signs in Europe that there are some potential shutdowns taking place, so at least additional restrictions. And so for Q4, we're monitoring that closely. We factored that in as we look forward in terms of our expectations for Q4. In fact, we said clinical sequencing activity in Q3 was 96% of pre-pandemic levels. Research was 82% of pre-pandemic levels, and we expect both of those to improve modestly, because of the fact that we're really tracking kind of how this pandemic evolves in Q4, and not to improve more than that. With regards to your other point about customers being more adaptive? I do think they are getting a bit more adaptive in terms of learning to work with the virus, not to say that they're not obviously very careful and cautious about that. But at the same time, when you look at, for instance, the number of labs that are now based on our Q3 data that are either completely open or in sort of some level of operation. It's about 90% of the labs compared to about 50% back in April. So that doesn't mean that 90% is all full systems ahead, and they're all open. But there are either fully open or in restricted operations, it's about 90% of the total labs globally. So, they are really gradually ratcheting back up, but, in a cautious way, and that's what's factored into our expectation.

And then, Puneet if I could comment on your GRAIL question. We talked about the fact that early detection of cancer represents by far the largest clinical application of genomics we're likely to see over the next decade or two. And we also talked about the fact that we expect many players in this market. And because it's such a large opportunity, we expect players to take different approaches, whether it's, single cancer versus multi-cancer or different technological approaches, and certainly we have a number of customers, including Thrive, Exact, but also Freenome and Guardant and other liquid biopsy players like Foundation Medicine that we expect to play a role in this market going forward. And we will continue to support all of those customers going forward. What attracted us to GRAIL was its unique position in that market in terms of being the closest to having a commercial test and in terms of having the performance characteristics consistent with being closest to having a commercial test. So GRAIL is looking to launch its test next year, and that'll likely make them the first player into the market. They've also undertaken by far some of the largest clinical studies in that space. And so they have over 100,000 people enrolled in the studies that they've done, and generated quite a remarkable bolus of data associated with their test. And then the performance characteristics of their tests are very strong. So for the 12 deadliest cancers, they have a sensitivity in the high 60% with a false positive rate of less than 1%, which really does represent a best-in-class product at this time in the market. What also like too is that they're the only player at this point that has FDA approval in terms of being able to run an IDE study to return results to patients. And so they're working with some of the premier healthcare systems, including the Mayo Clinic, Cleveland, Oregon Health System, the Intermountain health system, Dana Farber, Sutter Health. And so they already have their gallery test in the hands of doctors returning results to patients as part of their study. And so having that FDA approval is also very attractive. As and all of that obviously factored into the price associated with GRAIL.

Your next question comes from the line of Dan Arias with Stifel. Your line is open.

Good afternoon, guys. Thank you. Francis, on the All of Us sample that should begin to flow this quarter, is there a material consumables assumption that's built into that work for Q4? And assuming that things do get going there, you think that that should be all sequencing? Or might there be some genotyping that makes it into the mix there? And if I could ask a quick follow-on. It sounds like you're ticking modest growth in China. Is in the picture for 4Q? Did you say a year over year that would be a sequential step up there that we haven't seen in a while. So what's driving the confidence in the move, I guess, back up to the mid 19 billion?

Yes. Let's start with All of Us. For All of Us, we expect the All of Us samples to start flowing to partner genome centers in Q4 and to start to see both sequencing and genotyping activity. From our perspective, the actual revenue contribution into Q4 we're expecting modest. But it's a very important step, because it then sets us up well for All of Us to ramp up more meaningfully going into next year. And so it means that the workflows have been set up and machines are going into validation. So again, modest contribution in Q4, but that's a big step and sets us up we believe well going into next year. And then Sam, maybe you can talk about China.

Yes. So Dan, thanks for the question. First of all, with regards to China, we expect flattish year-over-year performance in Q4. So we said on the prepared remarks, for China and APJ, flat to slightly increasing. So for China, specifically it's flattish performance year-over-year. In fact, China, the clinical performance has been strong year-to-date and growing year-over-year. Research as we've talked about on previous calls has been impacted, definitely by the pandemic, repurposing some of the work towards PCR testing and just the general impact of that on research. But we're pleased with the clinical performance that we've had in China. Q3 had strong instrument placements as well in China, which bodes well for future activity. And so, pleased with the clinical performance there for sure. That will give us confidence.

Your next question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Thanks for the time. So a couple of questions for you, Francis and Sam. On the sequencing consumables line, you had some destocking in the second quarter. Did some sort of a restocking dynamic here play into that 29% quarter-over-quarter growth? And then in oncology, how are you thinking about sort of a bolus you're in the fourth quarter and in the first half of 2021 as the missed screenings come back online?

Yes. Thanks Tejas. With regards to stocking levels and restocking? Yes, in Q2, we had some customers that destocked specifically in AMR, so that was an impact on our performance in Q2. We have not seen from our data that there's been an increase in inventories or restocking back into Q3. So essentially what we've seen and we've really looked at this with a lot of our customers, we've seen that customers are really purchasing through the demand that they have, but have not restocked back some of the destocking that occurred in Q2. Nor are we expecting in Q4 that there is restocking either. That they're going to continue based on the activity levels that we track and triangulating that back with revenues, we can see that essentially they're buying to their demand.

And then, if we look at oncology. I mean, I think you bring up a really important point. I think one of the tragedies associated with the pandemic is that there are people who, frankly, aren't going in to get screened for cancer. And so, they're walking around with cancer developing. I think there are sort of two dynamics that will play out. One is there will be at some point a catch-up, right? Unfortunately for those of those individuals, that means that cancer has progressed. But whether that plays out in Q4 or next year, there will be a catch-up associated with people who haven't had their diagnosis yet. In addition, the other dynamic that's playing out is we're seeing that blood-based tests are actually doing better through the course of the pandemic. So if we look at how the markets playing out, the service providers that offer blood-based tests, have proven that their business is more resilient through the pandemic than the service providers that do tissue-based analysis. And so I think one of the things that's playing out through the course of the pandemic is you're starting to see an acceleration of blood as a sample type for cancer testing. So you're seeing an acceleration in the growth of liquid biopsies, which we think is a durable dynamic. And it's not just as a result of the pandemic, but we think that'll continue to play out in the coming years.

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. I guess two quick ones. One, maybe I misheard this, but big deal close. Is that a second half of next year? And I'm curious how we should be thinking about investments here. And then when you think about the system placements here, given this as a razor blade model, maybe perhaps elaborate on how the lower systems this year should play out next year? I do realize that the comps for consumables are easier. Should that offset the system declines for this year? I'm curious.

Yes. Let me address both points and provide some additional details. Regarding GRAIL, we expect the deal to close in the latter half of 2021 as we navigate the regulatory process. We've mentioned some potential dilution related to GRAIL, and we will have more information available as the deal progresses. Again, we're looking at the second half of 2021 for this. On the subject of instrument placements, you are correct that it follows a razor blade model. This is why we are encouraged by the recovery we're witnessing in instrument placements after exiting Q1. The strength in NovaSeq placements in Q2 and Q3, along with the anticipated pipeline as we enter Q4, is significant. Furthermore, the performance we are observing in the mid-throughput segment, particularly with NextSeq, including the new NextSeq 2000, as well as the 500 and the Dx models, bodes well for us as we look ahead to next year.

Your next question comes from the line of Catherine Shelton with Baird. Your line is open.

Hi. Thanks for the questions. I guess, two parter on the GRAIL studies. What's the timing next year in terms of when we can expect to see data from Pathfinder? And do you expect any performance degradation as you move into an all comers screening population for that study? And then second, for this Thrive study? I believe GRAIL completed enrollment in late 2018 and was following patients for 30 months. So is that something where we could see a readout at some point next year or more likely into 2022?

Yes. So we talked about the GRAIL studies. The easy answer is we don't expect the Pathfinder study to provide substantially different performance data than we have seen so far. And the reason for that is that GRAIL has done a number of other large scale studies. So the CCGA study had 15,000 people enrolled in the study. The second phase of that study was a prospective study and an all-comers study. And so given the size of the study, they've done with the same test. The performance data they've published externally is based on statistically significant data. So we didn't expect the Pathfinder data to reveal anything different. And in fact, before we signed the deal, we had a small group of people look at some of the early results or the mid-term results associated with Pathfinder. And while we won't probably share that, they are generally consistent with what we expect. And so we don't expect the final study results to get published next year to be significantly different from the performance characteristics that you've seen so far. What was the second part of that question?

With Thrive, Francis.

Yes. So Thrive is a prospective study. It's a 100,000 women, fully enrolled about 18 months ago. So it's again, pretty far down the line and again, similarly given the size of the studies that have gone before, we expect this to be further validation in terms of the performance characteristics and not significantly different.

Your next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Great. Thanks, guys. Maybe just one on the PopSeq side. It's encouraging to see some of those bigger projects gaining momentum to get flowing here in the near term. Obviously, the timeline can slip a few times now. Can you just talk to your confidence on these taking off on time, I guess, with the new 4Q timelines, particularly All of Us. And are those trajectories similar to kind of what you've talked about before? All of us I think, for example, at the beginning of the year, you kind of talked about 60,000 whole genomes in the first six months. Are we still thinking that the trajectories in the same once you do get launched? Thank you.

Yes. It's a good question. And as we look at where we are with those population studies, now, I'll touch on sort of the four big ones, right? So the UK Biobank, the Million Veterans Program, All of Us, and the UK NHS. And where we are now is that walking into next year, the majority of them have already been stood up, and it's a matter of just either getting back to where they were, which is, for example, the UK Biobank, or just ramping up volumes of samples. That's a much better place to be than we were last year, for example, where All of Us still had to get FDA approval, and then work out the workflows to get the samples flowing to its partner genome centers. And so if I look at all of them, the UK Biobank actually entered the year, sequencing at a high capacity, they pulled back in March because of the pandemic, and they're starting to ramp back up going into next year. And so, assuming conditions are good, we have high confidence in their ability to ramp up quickly. We talked about the fact that the Million Veterans Program has been remarkably resilient over the course of the year and in fact has increased its scope over the course of this year. All of Us we expect samples to be flowing in Q4. And so really, it is all about just scaling up next year, which is a pretty good place to be in terms of actually getting it going. And then the UK NHS for this year has been on hold, primarily as the NHS has been dealing with the pandemic testing that they're doing. But they are expected also to start sequencing later this quarter. And so that puts us, we believe, in a good position to start to see the scale up going into next year. So across all four, we feel really good that as we end this year, all of them will be in a position where they are processing samples and ready to scale up to deal with the pent-up demand that they've had.

Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open.

Thank you. Just a couple on the expense side. One, can you elaborate on what's happening on the gross margin line both the driver of the sequential downtick and the further downtick expected in the fourth quarter? And then secondly, can you talk about the anticipation of the GRAIL acquisition? Does that philosophically change any of your thinking around base Illumina budgeting as you roll into 2021? Thank you.

Thank you for the question, Dan. Regarding gross margin, the decrease from Q2 to Q3 was anticipated, and gross margin ended up slightly exceeding our expectations. This was influenced by increased freight and compensation expenses within our operations, as well as additional project costs. Looking ahead to Q4, the expected decline compared to Q3 is primarily due to a mix issue, where a strong quarter for instruments offsets some of the advantages from consumables, negatively affecting the mix. As for our outlook for 2021, we are not making any significant changes to our budget or approach regarding the core business at Illumina. We remain committed to investing in our core while also focusing on delivering shareholder returns over time. Additionally, we see a great opportunity with GRAIL and will continue to invest in that, even though it may dilute our results in the coming years. Therefore, no major changes are expected in our budgeting philosophy for 2021 concerning the core business.

Your next question comes from the line of David Westenberg with Guggenheim Securities. Your line is open.

Hi, thanks for taking the question. So, we appreciate kind of your long-term expectations of double-digit growth and consumables, sequencing consumables. Can you quantify how much of that is clinical and specifically, oncology is a component of growth? And then it's kind of a follow up to that. Can you quantify or maybe even disqualify the opportunity of moving from panels to panels from hotspot testing in terms of just growth there? Thank you.

Yes, David. As we began this year, we highlighted that the clinical business constitutes nearly half of our sequencing consumables, and it is growing at a much faster rate compared to the research segment. Therefore, you can expect these two aspects to eventually cross over, and once that happens, it will not revert. The clinical segment will dominate our sequencing consumables in both revenue and growth moving forward. Within the clinical consumables, oncology testing for therapy selection holds the largest share of the market. This trend is likely to persist. While we have long-term projections, you can count on oncology testing being a significant part of our clinical sequencing tools. We anticipate continued migration from hotspot testing to larger panels, driven by several factors, such as the rising use of tumor mutation burden (TMB) as a biomarker for therapies. Recent developments with Keytruda illustrate that merely examining gene hotspots is insufficient for therapy prescriptions; there's a necessity to consider factors like TMB, which will require more extensive panels. Additionally, as discussed at ASMO, we are witnessing increased guidance to utilize biomarkers like TMB, which will further propel the shift toward larger panels, resulting in more sequencing and faster growth in oncology testing, ultimately boosting the revenue from sequencing consumables.

Your next question comes from the line of Dan Brennan with UBS. Your line is open.

Great. Thanks for taking the question. Francis, could you just give us a sense of the upgrade opportunity that still remains ahead of you for your smaller customers that are in the HiSeq. I guess we haven't gotten to that in a while, particularly in light of the price cut and in the comments this quarter about the strong demand on SSE that you saw. So any color regarding the size of that opportunity, and what the early tracks and outlooks look like this quarter? And kind of how do you think that upgrade opportunity evolves as we look out? Thanks.

Yes. Maybe I'll start with sort of a qualitative view and we can work our way through that. So, when we talked about sort of the multi-year upgrade opportunity for NovaSeq there is this next segment that we're activating, starting with the Version 1.5 Reagent, which is the smaller core labs. They're the ones that primarily are still using the HiSeq. And frankly, they haven't had the volume to justify the upgrade because you need both to see the benefits associated with the consumables drop in cost. So 1.5 now changes the economics for them. And that's the segment of the customer base that we're looking to activate. It's been a while in terms of a number of incidents, so maybe I'll turn it over to you, Sam to give us some color on that.

Yes. Maybe the color I'll give, Dan, and thanks for the question. As we think about the NovaSeq placements, I know we used to give more specificity around this when we first launched NovaSeq and the number of HiSeq customers that we still expect to take on NovaSeq. But we haven't provided that for some time. But the metric I will give you is for NovaSeq placements year-to-date. We're still seeing roughly 40%-ish or so coming from new-to-Illumina customers. So really a great sign around the democratization of sequencing that NovaSeq has done. We're seeing about an additional 40% or so that's coming from NovaSeq capacity upgrades. So existing, obviously customers that are just upgrading or taking on more capacity. And then, roughly 20% or so from those HiSeq customers that are continuing to transition to NovaSeq. So that's still going on. We're going to continue to see that. The V 1.5 upgrade that we talked about will also help catalyze that as well, will drive that as well. So still very encouraging and good room to offset.

There are no further questions at this time. I'll turn it back over to our presenters for any closing remarks.

Thank you. And as a reminder, a replay of this call will be available on our website in the Investor Relations section, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining the call today. This concludes our call. And we look forward to updating you on our progress in the fourth quarter.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.