Earnings Call Transcript - ILMN Q1 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2022 Illumina Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Salli Schwartz, Vice President of Investor Relations. Please go ahead, ma'am.

Salli Schwartz, Vice President of Investor Relations

Good afternoon, everyone, and welcome to our earnings call for the first quarter of 2022. 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 have 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 provide an update on the state of Illumina's business and Sam will review our financial results, which include GRAIL. As a reminder, pending the outcome of the European Commission's investigation into Illumina's acquisition of GRAIL, the commission has adopted an order requiring Illumina and GRAIL to be held and operated as distinct and separate entities for an interim period. Compliance with the order is monitored by an independent monitoring trustee. During this period, Illumina and GRAIL are not permitted to share confidential business information unless legally required, and GRAIL must be run independently exclusively in the best interest of GRAIL. Commercial interactions between the two companies must be undertaken at arm's length. 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 documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Francis.

Francis deSouza, President and Chief Executive Officer

Thank you, Salli. Good afternoon, everyone. We maintained strong momentum across regions and markets in the first quarter. We saw particular strength in oncology, genetic disease testing and infectious disease and achieved record quarterly performance in the Americas and APJ. I'll share an overview of our results as well as our progress across our portfolio and markets before turning it over to Sam for additional detail. Before I begin, I'd like to extend my thoughts to everyone dealing with the war in Ukraine, and we will continue to support humanitarian efforts to help the affected communities. Starting with our financial results. First quarter revenue of approximately $1.22 billion increased 12% year-over-year. We received record orders in the quarter with sequencing consumables orders surpassing $1 billion for the first time and we exited the quarter with record total backlog, a great leading indicator for upcoming quarters. Turning now to performance across our platforms. Sequencing instrument shipments grew more than 20% year-over-year in the first quarter. We shipped a record number of NovaSeqs and received record NovaSeq consumables orders, demonstrating both strong demand for the instruments sixth year since launch and addition to our substantial installed base for future consumables revenue. More than half of NovaSeq shipments were to clinical customers and we saw particular strength in oncology testing as high throughput sequencing and comprehensive genomic profiling become increasingly critical to cancer patient care. In mid-throughput, the installed base of NextSeq 1000 2000 instruments has now exceeded 1,000. Additionally, Q1 shipments for the P1 flow cell that we launched in the fourth quarter of 2021 nearly doubled our expectations. We're seeing strong adoption of the P1 flow cell from both new customers and customers moving up the throughput spectrum as well as broad kit utilization from existing NextSeq 1000, 2000 users due to the P1 flow cell's efficiency and cost-effectiveness. Our low throughput platforms also continued to perform well and provide a great entry point to sequencing. More than one-third of shipments in the first quarter were to new Illumina customers, further increasing our installed base and enabling adoption of sequencing across a broad customer network. Looking now at our markets. Oncology testing sequencing consumables grew almost 20% year-over-year, as we continue to help democratize sequencing in this critical area of healthcare. In March, we received CE IVD approval for TruSight Oncology comprehensive in Europe. This new in vitro diagnostic comprehensive genomic profiling kit is the first distributed IVD for both DNA and RNA. TSO Comp IVD covers a range of mutations and biomarkers associated with the European Society for Medical Oncology guidelines, maximizing opportunities to find actionable information from each patient's biopsy. We're pleased with the early reception and excitement from customers across the EU. And we look forward to introducing TSO Comp IVD in other markets, including Japan, where we recently applied for regulatory approval. The TSO Comp IVD offering will build upon the incredible expansion we're seeing globally for TSO 500, which grew nearly 120% year-over-year in Q1. Also in oncology, customer and provider interest for Galleri, GRAIL's groundbreaking multi-cancer early detection blood test is growing. To date, Galleri has been prescribed by more than 2,400 prescribing physicians and GRAIL has entered into 34 partnerships with health systems, employers and insurers who are investing in multi-cancer early detection to improve outcomes. This includes GRAIL's recent partnership with Point32Health, the combined organization of Harvard Pilgrim Health Care and Tufts Health Plan. Point32Health's 2-phased pilot of Galleri marks GRAIL's first collaboration with a commercial health plan in the US. Last week, GRAIL also announced a multiyear partnership with Munich Re Life US to provide Galleri as part of Munich Re's commitment to advancing cancer early detection and treatment. Munich Re and GRAIL will collaborate to enable carriers and distributors to offer Galleri to existing policyholders who are at high risk of cancer, such as those aged 50 and older. Also, the NHS Galleri trial continues to progress, with more than 90,000 of the planned 140,000 participants enrolled. To support the increasing interest around Galleri and to further their R&D efforts, the GRAIL team has almost doubled in the last 8 months to more than 850 employees, with another almost 250 job openings. Looking ahead, GRAIL plans to expand its existing sales force for Galleri to reinforce launch traction and drive continued market adoption. Turning to our other markets. Genetic disease testing had another record quarter as we enable expanding coverage and utilization of whole genome sequencing or WGS globally. In the US, critically ill infants are now eligible for WGS in California, Oregon, and Maryland through Medicaid, providing coverage for an additional 17 million lives. And last week, we announced an agreement with Germany's Hannover Medical School to implement the use of WGS for critically ill children suspected of having a genetic or rare disease. This project, like our collaborations with other children's hospitals around the world, helps demonstrate how WGS can support earlier diagnosis and treatment for children in neonatal and pediatric intensive care. In reproductive health, coverage, reimbursement, and evidence generation continue to increase, particularly in Europe. Both Spain and Italy have expanded coverage for non-invasive prenatal testing, or NIPT, with Germany likely doing so as well later this year. In infectious disease and microbiology, we saw a record quarter with incremental global investments in pathogen identification, monitoring and resistance. While this was driven by COVID surveillance, we are also seeing traction for other pathogens, including tuberculosis. In March, the Milken Institute called for a network of multisector stakeholders to collaborate on data, insights, and responses for early disease outbreaks. In the same month, the World Health Organization announced a 10-year strategy to use the power of genomics for global pan-pathogen surveillance, demonstrating the growing trend for broader pathogen monitoring. For example, FIND, a Geneva-based Global Alliance for Diagnostics, established Seq&Treat, a global initiative using sequencing for drug-resistant tuberculosis which affects nearly 0.5 million people globally each year. We're providing instruments to help Seq&Treat accelerate discovery for the half of patients with drug-resistant tuberculosis who are not currently successfully treated. In our research and applied markets, we continue to see genomic research expanding across applications and disease states. Lab budgets, specifically for NGS are increasing, including for both academic labs growing approximately 9.5% and pharmaceutical and industry labs growing at approximately 14%. As part of our efforts to support growth in genomic research, we recently partnered with Allelica to provide cutting-edge polygenic risk score digital tools to our customers. With Allelica's software, researchers can better identify individuals with high genetic susceptibility for developing life-threatening diseases. Also in research, increasing utilization and demand for multi-omics, particularly proteomics is driving sequencing growth and opportunities. Our partnership with SomaLogic to co-develop a high plexity, high sensitivity and high specificity proteomics assay is progressing well. Together, we look forward to empowering the next generation of novel insights. Another fast-developing area is the integration of multiomic and genomic data into drug development and clinical trials. Drug development R&D spend is more than $123 billion annually, yet more than 90% of drugs that enter Phase I clinical trials fail to reach clinical approval, with fewer than 70 entering the market each year. A main contributor to this high failure rate is target selection, where genomic-based methods can more than double success rates and dramatically improve cost and speed to market. Because more than 85% of the human proteome cannot currently be targeted pharmacologically, we are excited to support genetic lead discovery and emerging drug modalities that could significantly expand the total number of potential therapeutic targets. In addition to our partnership with Nashville Biosciences, today we announced a partnership with Deerfield Management. This first-of-its-kind collaboration will combine Illumina's genetic and AI-led approach to discovery with Deerfield's expertise in preclinical and clinical development. Together, we plan to translate genetic insights into new therapies across diseases with unmet medical needs and drive a step change in the pace and efficiency of drug development. This will ultimately help more patients access potentially life-changing therapies. We also recently announced a collaboration with Janssen to accelerate the development of precision medicines. This includes developing companion diagnostics across our new TSO Comp IVD and exploring discovery and research initiatives for drug and biomarker targets across disease states. These collaborations are a few of what we expect will be many pharmaceutical strategic partnerships, leveraging the power of Illumina to create precision medicine at scale. Overall, we were pleased with our first-quarter performance, including 20% growth in sequencing instruments and sequencing consumables orders surpassing $1 billion for the first time. The significant ongoing growth in our installed base as well as our record backlog exiting the quarter lay the groundwork for continued acceleration of our business in the coming quarters. I'm also really excited about the work we're doing with our collaboration partners. These efforts underpin our ongoing progress in driving sequencing trends to improve human health. I'll now turn the call over to Sam to discuss additional details on our results and outlook.

Sam Samad, Chief Financial Officer

Thanks, Francis. As a reminder, our first quarter financial results include the consolidated financial results for GRAIL. I'll start by reviewing our consolidated financial results, followed by segment results for core Illumina and GRAIL then conclude with our current outlook for 2022. I will be highlighting non-GAAP results, which includes 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 in the supplementary data available on our website. Our record first quarter revenue of $1.223 billion grew 12% year-over-year, with core Illumina sequencing instruments growing at 20% and sequencing consumables growing at 13%. Sequencing consumables growth was solid across both clinical and research, with both market segments growing in double-digits. For the first quarter, GAAP net income was $86 million or $0.55 per diluted share, and non-GAAP net income was $169 million, or $1.07 per diluted share, which included dilution from GRAIL's non-GAAP operating loss of $134 million for the quarter. Our non-GAAP tax rate was 17.8%, which decreased 250 basis points year-over-year, primarily due to tax expense recognized in Q1 2021 on certain foreign subsidiary earnings that are no longer indefinitely reinvested. The increase in the non-GAAP tax rate from Q4 2021 was primarily due to the impact of R&D expense capitalization requirements implemented by the Tax Cuts and Jobs Act of 2017. Our weighted average diluted share count for the quarter was approximately 159 million. Moving to segment results, I will start by highlighting the financial results of core Illumina. Core Illumina revenue grew 12% year-over-year to $1.221 billion. Core Illumina sequencing consumables revenue grew 13% year-over-year to $784 million, driven by the growing NovaSeq installed base across clinical and research markets. Sequencing instruments revenue for core Illumina reached a new high, growing 20% year-over-year to $212 million. This was driven by another record quarter of NovaSeq system shipments, resulting from accelerating demand in oncology testing, which accounted for almost 40% of the NovaSeq shipments for the quarter. We also continued to see strong demand for NextSeq 1000, 2000 from new Illumina customers, who represented more than a third of the shipments for the quarter. During the first quarter, COVID-19 surveillance contributed approximately $53 million in sequencing consumables revenue and $7 million in incremental instrument revenue, driven by the sustained focus on pathogen surveillance. Core Illumina sequencing service and other revenue of $111 million was up slightly year-over-year, driven by growth in instrument service contracts. Moving to regional results for core Illumina. Revenue for the Americas region was $646 million, growing 15% compared to the prior year period. Growth in the region was primarily driven by strength in three key areas: first, continued sample growth in oncology therapy selection; second, emerging applications such as single-cell and proteomics; and third, pathogen surveillance initiatives. EMEA delivered revenue of $316 million, representing 4% growth year-over-year, driven by strength across both clinical end markets and emerging markets, partially offset by the conclusion of the UK Biobank program in the third quarter of 2021 as expected. EMEA growth was modestly impacted by lower shipments to Russia as a result of the war in Ukraine. Greater China revenue of $127 million was flat year-over-year as the region's robust clinical demand in hospitals was offset by COVID-19 restrictions that began in March. Finally, APJ revenue of $132 million grew 33% year-over-year with stronger than expected growth from large-scale research projects, oncology and genetic disease testing and pathogen surveillance initiatives. Moving to the rest of the core Illumina P&L. Core Illumina non-GAAP gross margin of 70.2% decreased 30 basis points year-over-year due primarily to increased freight costs attributable to broader global supply chain pressures. Core Illumina non-GAAP operating expenses of $505 million were up $85 million year-over-year due primarily to headcount growth and investments we are making in R&D and operations to support the growth and scale of our business. Despite the year-over-year increase, non-GAAP core Illumina operating expenses for the first quarter were roughly $15 million lower than we expected as a result of the slower hiring and timing of project spend shifting into the second quarter. Transitioning to the financial results for GRAIL. GRAIL revenue of $10 million for the quarter consisted primarily of Galleri test fees. GRAIL's non-GAAP operating expenses totaled $139 million for the quarter, which consisted primarily of expenses related to headcount and clinical trials. GRAIL non-GAAP operating expenses were approximately $15 million lower than we expected due to timing of spend shifting to the second quarter. Moving to consolidated cash flow and balance sheet items. Cash flow from operations was $172 million. DSO was 46 days compared to 49 days last quarter. First quarter 2022 capital expenditures were $61 million and free cash flow was $111 million and we did not repurchase any common stock in the quarter. We ended the quarter with approximately $1.4 billion in cash, cash equivalents, and short-term investments. Moving now to 2022 guidance. We continue to expect consolidated revenue growth of 14% to 16% for 2022, including core Illumina revenue growth of 13% to 15% and GRAIL revenue of $70 million to $90 million. And we continue to expect non-GAAP earnings per diluted share in the range of $4 to $4.20, which includes dilution from GRAIL of $3.75 in line with previous expectations. We are reaffirming all other financial guidance for the full year 2022, we provided in February, with the exception of our consolidated non-GAAP tax rate, which we now expect to be approximately 18%. Our outlook for 2022 assumes the lockdowns in China ease by June and our business in China recovers in the second half of 2022. For the second quarter of 2022, we expect consolidated revenue to increase 7% to 9% year-over-year from the second quarter of 2021, including an approximately 300 basis point headwind on overall revenue growth related to current COVID-related shutdowns in China. We expect consolidated non-GAAP gross margin to be roughly flat sequentially from the first quarter of 2022. We expect consolidated non-GAAP operating margin to be approximately 10%, with the sequential decrease from Q1 2022, driven primarily by a $60 million increase in core Illumina operating expenses and the $25 million increase in GRAIL operating expenses. The expected increase in operating expenses is primarily driven by our typical ramp in compensation-related expenses, including our merit increase cycle, the timing of hiring and project spend shifting into Q2 from Q1 and the ramp in GRAIL's operating expenses. We expect core Illumina non-GAAP operating margin to be approximately 23% in the second quarter. We expect the second quarter consolidated non-GAAP tax rate to be in line with our full-year 2022 guidance of approximately 18%. And lastly, we expect diluted shares outstanding to be in line with our full-year 2022 guidance of approximately 159 million shares. I will now hand the call back over to Francis for his final remarks.

Francis deSouza, President and Chief Executive Officer

Thanks, Sam. As we look ahead, our business fundamentals remain very strong. The continued growth in our installed base, our record backlog exiting Q1 and the increasing volumes we're seeing as customers pursue higher intensity sequencing applications all bode well for future growth, especially in the second half of this year. We also continue to drive increased access and deliver breakthrough genomic innovations. We're making progress across our innovation pipeline with data and excitement building around our breakthrough Chemistry X, our infinity Long Read technology and our NovaSeq Dx platform. We will provide additional updates on these technologies in the coming months and we look forward to welcoming thousands of customers from around the world to the Illumina Genomics Forum in late September. Also, we are pleased to invite you to join us this fall for our Investor Day which will be held Monday, October 3 in San Diego, following the Illumina Genomics Forum. We will be announcing additional details in the coming days. Across our global business, we are at the forefront of genomics in healthcare. We're excited to deliver new technologies, collaborate with pioneering partners, champion patient access, and support incredible researchers and clinicians around the world, as we collectively unleash the power of genomics for the betterment of human health. I'll now invite the operator to open for Q&A.

Operator, Operator

Thank you. We'll take our first question from Dan Brennan. Please go ahead. Your line is now open.

Dan Brennan, Analyst

Great. Thank you. Thanks for taking my questions. Maybe I have a couple part questions, just to kick it off, Francis and Sam. First part is on China, 10% of your revenues, you talked about the headwind in Q2. Can you just give us a sense of how it played out for you in Q1? It was flat, obviously, a pretty big deceleration. Just wondering, how much China really took away from what you expected in kind of 1Q? Second part of the question is on instruments and consumables for NGS. You're kind of maintaining all your guidance numbers. I believe, you were kind of thinking about 10% instrument growth, and I believe 18% consumable growth for the year. You obviously trended above that on instruments in Q1. And you were below that on consumables. So just walk us through, particularly in consumables, kind of how the year is going to play out and was 1Q impacted, whether it be by China or by anything else. And then, the final part of the question is just AGBT. Presumably, we're going to get the update on Infinity there. Are we going to learn anything on Chemistry X or is that going to have to wait for the fall. Thank you.

Sam Samad, Chief Financial Officer

Yeah. Hi Dan. Thanks for the question. So this is Sam. I'll start with the first two questions, and then I'll turn it over to Francis on the AGBT question. So with regards to China, China was approximately $10 million lower than our expectations in Q1, and that was really all driven by the restrictions that we saw in March. So as you know, in March, we saw really large significant restrictions in Shanghai, basically shutting the whole city down. But also, we saw restrictions in a number of other cities as well, and that got reflected with about a $10 million downside in Q1. As we said in Q2, we expect a 300 basis point headwind on overall company growth in China. So all in all, I would say in the first half, it's about a $45 million headwind for China on our results. But we are expecting that by June, the restrictions start to ease. We're already seeing promising things in Shanghai. Beijing, I think there's mass testing going on. And so we're keeping obviously close to that situation. But we're optimistic that as we get into June and beyond, this will start to ease. The underlying fundamentals of demand in China are really strong. Our backlog is up as we enter into Q2. It's higher than the last two quarters. We've added new hospitals, almost 38 hospitals that we've added to our installed base. We're increasing our penetration in hospitals. The question is really just about restrictions and the ability to get products to customers just given the fact that there are shutdowns. With regards to your second question on instruments and consumables, yeah, we had a very strong start to the year regarding instruments, over 20% growth. We said going into the year that this is going to be a more, I would say, less back-end loaded year for instruments. We're going to have a strong start. It's going to be more sequentially even in terms of instruments. So we are still reiterating our guide for 10% growth. We had a very strong backlog. And we still do going into Q1. And so we are basically shipping and delivering on that backlog as you saw in Q1 with our strong results. And with regards to consumables, consumables actually were better than expectations in Q1. So they grew by 13% and they were better than what we expected in Q1, even with the impact of China. As you think about Q1, think about some of the impacts in Q1 of last year that actually muted some of the growth of 13%. If you normalize for those, things like the U.K. Biobank, in Q1 of 2021, which was a $20 million benefit, we had some stocking in Q1 of 2021, which was also about a $20 million one-time impact. If you normalize for those, consumables would have grown in the high teens. So we still have a lot of confidence in terms of our guide of 18% in consumables for the full year. I'll turn to Francis.

Francis deSouza, President and Chief Executive Officer

Yeah, Dan, let me take the questions about Chemistry X and Infinity. The teams are making really good progress in both. Our strategy is going to be on Infinity to have more customer data come out over the course of the rest of the year as we get closer to launching Infinity. And then with Chemistry X, you will absolutely have a lot more information at the customer event and then at the investor event as well. And then between now and then to the extent that there is some new material data to show, we will bring it out.

Operator, Operator

Thank you. We'll take our next question from the line of Dan Arias. Please go ahead. Your line is now open.

Dan Arias, Analyst

Hi, everyone, thanks for the questions. Francis, following up on what you mentioned last quarter about the backlog being twice what it was the previous year, could you confirm that it has continued to grow and is now at record levels? Is that correct? Also, regarding the pull-through rate for the NovaSeq, did it meet your expectations for the year, or did some events in March hinder progress, with the possibility of returning to that range later in the year? Lastly, is there any update on GRAIL concerning the European Commission and the timing of developments related to that process? Thank you.

Sam Samad, Chief Financial Officer

I can address the question about backlog. We mentioned that our instrument backlog reached a record level going into Q1, which was twice the amount we had at the start of last year. Overall, the backlog also set a new record in Q1. To clarify, we had a record overall backlog at the end of Q1, with significant growth. However, the doubling figure mainly pertains to the instrument backlog. Regarding the NovaSeq pull-through, we anticipate it will be in the range of 1.2% to 1.3%. We've seen exceptionally strong placements for NovaSeq, and Q1 was a record shipment quarter for that product. As we expand our installed base and continue shipping NovaSeq units, it typically takes customers about one to two quarters to reach their normal pull-through levels. Nevertheless, we are confident that we will maintain the 1.2% to 1.3% pull-through range for the year.

Francis deSouza, President and Chief Executive Officer

And then let me pick up on the question around GRAIL and timing with the European Commission. As you know, we're engaged in two processes in Europe. One is with the European Commission around their phase two review. We continue to be engaged with them. The clock is paused as we are working with them to see if there are remedies that could get this deal approved and we expect a decision on that to come either later in Q2 or in Q3. We are also engaged with the EU General Court as we work through the jurisdiction of the European Commission to review this deal, and we expect a decision on that similarly to come either later in Q2 or early Q3.

Operator, Operator

Thank you. We'll take our next question from the line of Derik De Bruin. Please go ahead. Your line is now open.

Mike Ryskin, Analyst

Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow up on the instrument strength in the quarter. Again, another really good result after a strong run in 2021. I'm sure you know, there's increasingly more product launches coming in the space from a number of competitors. Some have already launched and we're in the process of launching more or less as we speak. I'm just wondering, has that shown up in any of your conversations with prospective customers? Are you competing more with any of these head-to-head? Is it coming in when you're having pricing conversations with them or any committed contract or anything like that? I'm just wondering if that's shown up on the margin, especially in the mid-throughput part of the portfolio.

Francis deSouza, President and Chief Executive Officer

Yeah. I'll start by saying that overall, we believe that the genomics market is a large and growing market that we're in the very early stages of penetrating. And so as we've seen before, and we'll continue to see, there's room for growth of multiple players in this market. And we expect that to be true for a long time going forward. The customers we sell to are among the best and brightest in the world. They're obviously aware of the options that are out there, and we do have those conversations. And so all our customers, I think, are very well informed about what the genomics landscape looks like, who's available, what's coming and what to expect from different vendors. So they're absolutely part of those conversations. You see the strength, though, in the numbers we put up, right? You saw the 20% growth in Q1. You saw the strong orders, strong shipments; you especially see the strength in areas like NovaSeq, for example, where we had a record year last year. We had a record Q1 in terms of shipments. And that continues to be because whether it's at the high end of the portfolio or in the NextSeq line or even at the smaller end of the portfolio, we continue to provide a superior value proposition that is meeting the needs of customers in terms of total cost of ownership, in terms of performance, in terms of price points. And that's, frankly, the job we have to continue to do, continue to earn our customers' business by making sure that that continues to hold true.

Operator, Operator

Thank you. We'll take our next question from the line of Tejas Savant. Please go ahead. Your line is now open.

Tejas Savant, Analyst

Hey, guys. Good evening, and thanks for the time. Francis, I'll ask a two-parter, one on GRAIL and one on competitive dynamics similar to the prior question there. So you did about $10 million in revenue. You're still expecting about $80 million from GRAIL at the midpoint, so a fairly steep ramp through the rest of the year. Can you share some light on what sort of the uptake rate within the patient population here that you're assuming for Galleri in terms of your current health system and employer partners? And then on the competition, you've had some of the emerging competitors. Your talk of mid-single-digit price per GB sort of price points on their medium throughput instruments. Do you see yourselves as having sort of enough flexibility to go lower perhaps at the high end of the portfolio, $100 to $200 genome? Or do you see enough delight in terms of other specs that you'd still be very competitive and stay the preferred vendor for your customers?

Francis deSouza, President and Chief Executive Officer

Thank you for the questions. Let's address them individually. We are very satisfied with GRAIL's performance. In the first quarter, they achieved more than just the $10 million in revenue; they also grew the number of prescribing physicians to 2,400 and expanded their partnerships with health systems, employers, and insurers to 34. They remain on track to meet the revenue goals we set at the beginning of the year, which range from $70 million to $90 million. An important development is their agreement with Point32Health, the first commercial insurance provider in the U.S., which will be beneficial as they implement it internally and extend it to their clients. Additionally, they secured their first life insurance company partnership with Munich Re, which we believe opens up significant potential for GRAIL. Furthermore, we are encouraged by GRAIL's progress with the NHS trial, now having enrolled 90,000 participants toward a goal of 140,000, moving closer to the next phase of expanding the trial to a million individuals in the UK. Overall, we feel positive about our trajectory based on our initial plan for the year. Regarding competition, we believe there is still room for expansion. Customers evaluate the total cost of ownership of a system, which includes the price per gigabyte but also factors in other elements like compute infrastructure. Our offerings, such as the NextSeq and NovaSeq systems, go beyond basic sequencing by incorporating advanced computing capabilities and lossless data compression algorithms, allowing some customers to achieve a significant reduction in required data storage. This comprehensive value enhances our competitive edge. Furthermore, we are committed to further reducing the price per gigabyte. Our ongoing innovations and technological advancements provide us with ample opportunities to achieve this, ensuring that we maintain a strong value proposition in the market.

Operator, Operator

Thank you. We'll take our next question from the line of Kyle Mikson. Please go ahead. Your line is now open.

Kyle Mikson, Analyst

Great. Hi guys. Thanks for taking the questions and congrats on the quarter. I appreciate that we'll be hearing and seeing more about the new products in the near term. But specifically, when should we expect to hear some commentary around the Chemistry X economics? And maybe just to establish a benchmark, would 20% to 25% lower pricing to our original expectation, that's 20% to 25%? The second question about GRAIL. I understand the biopharma and MRD collaboration revenue represents a portion of the GRAIL revenue guidance. But with respect to the Galleri revenue specifically, does the guidance assume most of the clinical trial revenue, like you were mentioning Francis NHS Summit drive, et cetera, or actual diagnostic revenue like Intermountain, Alignment, et cetera?

Francis deSouza, President and Chief Executive Officer

All right, let me address the questions individually. Chemistry X will keep you updated with technical information as it becomes available. The economic update will depend on the specific instrument we integrate Chemistry X into, as the economics will vary. Ultimately, the economic performance of an instrument is influenced not only by the new chemistry but also by all other components, such as the optics, flow cells, and computing infrastructure. Chemistry X will definitely play a significant role in enhancing the economics of an instrument, but to provide an overall economic picture, we would need to present the complete configuration of the instrument and then share the resulting performance. I can confidently say that a reduction of 20% to 25% would be considered minimal. If you evaluate the trajectory of the new chemistry, comparing it to the last generation, when Solexa was introduced in 2007, the cost to conduct a genome was $150,000, and today it's less than $600. While I want to acknowledge that the chemistry isn't solely responsible for this reduction—there have been innovations in optics, data paths, and computing—there has been a significant roadmap of price reductions. This represents the most important update in chemistry since the original SBS was created. Therefore, consider the longevity of this chemistry as providing substantial opportunities for performance improvements and price reductions. Personally, I would be disappointed if we only saw a reduction of 20% to 25% over the lifespan of this chemistry. Now, regarding GRAIL, we have reaffirmed that most of this year's GRAIL revenue will come from testing. There will be some revenue from their pharmaceutical partnerships, but it will not be the primary source of revenue, which is what they are working towards on their existing plan.

Operator, Operator

We'll take our next question from the line of David Westenberg. Please go ahead. Your line is now open.

David Westenberg, Analyst

Hi. With the point of the cost per G in competition, I realize maybe just getting a little bit old, but it didn't get my specific like thought or thought process or a specific question. And that would be the mid-throughput is definitely crowded. You've gone on in length about the competitive levers you have to pull in that. When we're talking about the high throughput market, somebody who's catching you in price per G or even higher than that, how comfortable do you feel that in the high throughput range of competitive launch would not be that detrimental to you? And should we use BGI as an example? And hopefully, this is a quick question for my follow-up here for Sam. And that is a lot of the cash flow generating. Cancer labs are in cost-cutting mode. Has the conversation around investment in sequencing instruments come up as part of that cost reduction? Thank you.

Francis deSouza, President and Chief Executive Officer

Thank you for the question. Let me begin with the first part. We have consistently faced competition in the high-throughput environment, and we anticipate that will continue. The genomics market, as I mentioned earlier, is vast and expanding, still in the early stages of market penetration. Therefore, we expect new vendors to emerge while others may exit the market. We are prepared for competition in this arena, which is integrated into our strategic plans. I remain confident in our competitive position in the market and am incredibly excited about our roadmap for strengthening that position. As I previously noted, regarding costs, it’s crucial to consider the total cost of ownership, particularly in high-throughput scenarios. Given the large volume of data generated, the expenses related to computing, storage, and the entire workflow are significant. Our innovative strategies not only enhance the performance and pricing of core sequencing but also improve our end-to-end workflow, enabling us to provide a compelling value proposition in the high-throughput market. Now, regarding your second question about cost-cutting.

Sam Samad, Chief Financial Officer

Yes. So Dave, thanks for the question. The short answer is no, but I'll explain why that's not the case that we're seeing any cost-cutting on sequencing. So when you think about our customer universe, we've got about 8,000 customers, an incredibly diversified customer base. But if you think about the commercial labs, clinical customers, I mean, sequencing is part of what drives revenue for them. So really, all the demand is driven by the end markets. And it's really driven by the need for testing and the fact that we're seeing very robust demand driven by robust reimbursement, market access and utilization in markets in oncology or genetic disease testing. So no, we're not seeing any slowdown driven by cost cutting because I think it's really driven by end demand. On the research side, we're still seeing very strong funding to the research market whether it's, again, into research in oncology, research in genetic disease, or research in pathogen surveillance and other initiatives. So I think the short answer would be no, but hopefully, this gives you a bit of color why.

Operator, Operator

Thank you. We'll take our next question from the line of Puneet Souda. Please go ahead. Your line is now open.

Puneet Souda, Analyst

Thank you, Francis and Sam, for taking my question. Francis, based on your comments about Chemistry X and the potential capabilities of the new instrument, it seems this could lead to advancements beyond the $100 genome. Can you discuss the applications that might emerge with reductions exceeding 25%? Additionally, how might this change the diagnostic mix for your customers in the long term? I understand they currently comprise nearly 50% of the sequencing consumables. Could you provide more insight into the applications and where your diagnostic customers might be headed? Also, Sam, could you clarify how much pricing contributed in the last quarter and what we can expect it to contribute for the year based on your guidance? Thank you.

Francis deSouza, President and Chief Executive Officer

Yes, Puneet. There are numerous opportunities that can arise as we continue to reduce the cost of sequencing. Currently, we are still in the early stages of comprehending how a genome relates to human health and diseases. We have made progress in certain clinical applications such as non-invasive prenatal testing and cancer therapy selection. However, many more applications will likely emerge as we conduct larger experiments. For instance, with complex diseases like neurological conditions—such as autism, schizophrenia, Alzheimer's, and Parkinson's—research indicates that there is a genetic component, but the causality is intricate. To truly understand the biology, we need to run larger cohorts, significantly beyond the thousands or tens of thousands that have typically been studied. There is substantial potential to uncover and address the genetic factors of neurological conditions, but we require much larger cohorts than what has been historically used. Additionally, to grasp the variability in gene expression among the trillions of cells in the human body, we need experiments involving millions or even tens of millions of cells, rather than just thousands. By driving prices down, we open up vast areas of research, which can ultimately lead to new diagnostics, screening methods, and therapeutics. Genomics currently helps address cancer, one of the top ten causes of death globally. Looking ahead, it's likely that genomics will assist in addressing all ten causes, but to truly grasp the biology, we need extensive research and a new range of diagnostic tools and treatments. This is what will become feasible.

Sam Samad, Chief Financial Officer

Yes. Thank you, Puneet, for your question about pricing. To explain our typical approach, which was indeed the same in Q1 as in previous years, we usually implement a low single-digit price increase on some of our products, primarily on the reagent side and library prep. This low single-digit increase is consistent with our annual practice and has some influence on the full year, as it's already included in the guidance we provided. However, it is not unusual compared to previous years. We have not introduced any significant inflation-driven price increases for our customers, nor have we applied any freight increases at this time. So, we have carried out our usual price increase for Q1.

Operator, Operator

Thank you. We'll take our next question from the line of Patrick Donnelly. Please go ahead. Your line is now open.

Patrick Donnelly, Analyst

Hi, guys. Thanks for taking the question. Francis, maybe one on the clinical market. Obviously, the momentum there continues to build for really strong numbers. Can you just talk about where you're seeing the most strength underlying there? And then obviously, you talked a little bit about the competition. How confident are you in kind of your positioning there as maybe some more people come after the clinical side?

Francis deSouza, President and Chief Executive Officer

We are experiencing significant strength in the clinical market across various regions, particularly in the Americas. Despite the COVID restrictions in China, we have strong momentum there as well, having signed 38 new hospitals recently. A key contributor to this growth is oncology testing for therapy selection, supported by expanded coverage and the transition from smaller panels to comprehensive genomic profiling that necessitates larger panels. The interest in clinical exomes is also contributing to this strength. Various metrics indicate the robust demand, with around 40% of the NovaSeqs shipped in Q1 going to oncology testing customers. Oncology testing is a major driver of our growth in clinical markets, a trend that continues this year as demand remains strong. We've also seen significant demand for genetic disease testing, which enjoyed another strong quarter, backed by the expansion of coverage and the sequencing-intensive nature of these applications, like clinical genome testing and trios. Both oncology and genetic disease testing markets have considerable growth potential. Our established strengths in the clinical market have positioned us well, with cleared instruments like the MiSeqDx and NextSeqDx, and we are on track to deliver a NovaSeqDx. This makes us an excellent choice for customers looking to develop on cleared platforms. Our end-to-end workflows, such as TSO 500, have seen outstanding growth, over 100% compared to last year. We are also seeing demand for our VeriSeq NIPT workflow. Customers appreciate these cleared workflows, and those operating in LDT mode have invested time in developing validated workflows on our instruments, making it more advantageous for them to expand their relationship with Illumina. These factors highlight the dynamics in our market.

Operator, Operator

Thank you. We'll take our next question from the line of Vijay Kumar. Please go ahead. Your line is now open.

Vijay Kumar, Analyst

Hi. Thanks for taking my question. Sam, can you provide clarity on the guidance for the second quarter? At the midpoint, even excluding the 300 basis points impact from the China lockdown, it seems to be $1.25 billion, which is below analyst expectations. Could you discuss any issues with the cadence? Is this related to comp issues or the models used by analysts? Also, related to the supply chain in Q1, earnings were about 19% of our analyst models. Are there any cadence issues with expenses or incremental supply chain pressures that are factored into the guidance, considering the strong outlook for Q1? Thank you.

Sam Samad, Chief Financial Officer

Regarding Q2, there is a 300 basis point impact on growth from China. Additionally, in Q2 of 2021, we experienced a one-time benefit from an NIPT settlement amounting to $20 million, which affects year-over-year growth. This is not a sequential impact, and regarding your other question about sequential changes, the main factor is that China represents a $35 million negative impact in Q2. However, we are still confident in our guidance for the second half and anticipate momentum. There's also the U.K. Biobank situation which will conclude at the end of Q3. On the topic of supply chain challenges, like most companies, we are feeling pressure, which is reflected in our operating margin guidance. We don't expect any new issues in the second half compared to the first half. Our operating margins are approximately 14% for the first half and around 17% for the second half, partly due to the scaling of revenues. Despite supply chain pressures, we are managing effectively to avoid disruptions and offset additional costs, and we remain confident in our operating margin guidance and anticipated sequential growth for the second half.

Operator, Operator

Thank you. We'll take our next question from the line of Luke Sergott. Please go ahead. Your line is now open.

Unidentified Analyst, Analyst

Hey, guys. Thanks for squeezing me in. Can you talk about the GRAIL adoption? I know you've talked about this a little bit. But outside of concierge and the executive health plans, kind of the demand that you're seeing there from just the regular normal customer?

Francis deSouza, President and Chief Executive Officer

Certainly. In addition to what you've mentioned, we are witnessing interest from various groups, particularly employers. It's been surprising and exciting to see the diverse industries that are enrolling. While we anticipated early adoption primarily from sectors like technology and financial services, the variety of industries participating has exceeded our expectations. For instance, we're seeing involvement from logistics and transportation companies, as well as media companies, and this trend continued into the first quarter. Moreover, organizations are enrolling beyond just concierge systems, including health systems like Point32Health and life insurance firms such as Munich Re. There's also a retail aspect associated with their offerings through a collaboration with Genomic Health that has been steadily increasing. This growth is fueling their desire to broaden their visibility among consumers. Additionally, they are enhancing their direct engagement with oncologists and have been expanding their staff, specifically their commercial and sales teams that connect with doctors. This development is likely to boost demand by bringing in new prescribing doctors and increasing the number of tests ordered by them.

Operator, Operator

Thank you. We'll take our next question from the line of John Sourbeer. Please go ahead. Your line is now open.

John Sourbeer, Analyst

Thanks for taking the questions. Just two-parter here. On the GRAIL MRD assay. Any updates there on potential studies or milestones on the way as we look into the 2023 launch? And then on Chemistry X, details have been limited. But what has been the initial customer feedback there given the record NovaSeq backlog and potential for the new platforms in the horizon, just what a customer said within the initial feedback there? Thanks.

Francis deSouza, President and Chief Executive Officer

Sure. The GRAIL team continues to make progress in their MRD. We are excited about what that would bring to the market, using their sort of hypothesis-free tumor-naive approach into the market. We think that's a valuable assay for customers and allows them to get tested more quickly than an approach that requires a tissue sample, for example. So we think it will be a valuable add into the market. At this point, we don't have any additional updates other than the team is continuing to work on it and making progress. But as soon as we have some, we will make sure to share it. The initial reaction from customers on Chemistry X has been very positive, just building excitement around what it could do. Obviously, at this point, it's not tied to a specific instrument and sort of curiosity around when and through what form factor they'll get access to Chemistry X, but there's general enthusiasm around the promise of the new era of chemistry for SBS. And they've all seen what SBS has done over the last 17 years. And so a huge amount of enthusiasm for the next leg of this journey. Sorry that I will say though, having said all that, it hasn't really muted as you've seen the demand for our existing instrument, the NextSeq 1000, 2000, the NovaSeqs, we continue to see really strong demand for those instruments. And that's because our customers know we have a history of looking after our customers as we launch new products, right, by providing them very robust upgrade paths and looking at what they've ordered in the backlog and making sure they are happy about how we can move orders to new instruments, if that's what they choose. And so we've established, I think, a good track record of carrying people through an upgrade process and whether it's trade-in policies. And so that track record over the last decade, I think, is helping in terms of customers feeling confident about moving forward with instruments, knowing that to the extent that we launch an instrument that upgrades any part of our portfolio, we will have very robust upgrade programs for them.

Operator, Operator

Thank you. We'll take our next question from Jack Meehan. Please go ahead. Your line is now open.

Jack Meehan, Analyst

Thank you. Good afternoon. I have three questions about GRAIL. First, NCI recently mentioned that detecting cancer alone isn't sufficient; the MCED test must enhance survival rates. Francis, I would like to know your thoughts on that. Second, can you provide your latest insights on the timeline for FDA approval of Galleri? Lastly, how confident are you that the study is proceeding well and that the enrollment numbers are sufficient for FDA approval? Thank you.

Francis deSouza, President and Chief Executive Officer

Yes. Let's discuss all three points. First, regarding the NCI commentary, it's important to focus on the impact on survival rates, which we will be monitoring over the next few years. It will take time to gather this data, but we are committed to it. We know that survival rates for cancer vary significantly based on the stage at which it's detected. For instance, with pancreatic cancer, early detection leads to higher survival rates compared to late-stage diagnoses. The burden of cancer is significant, with 10 million deaths annually, including 600,000 in the U.S. Notably, 71% of cancer-related deaths occur from types that lack screening, making early detection paramount. This knowledge drives doctors to recommend this test to their patients, resulting in an increase from no doctors a year ago to 2,400 doctors currently prescribing it. We anticipate this trend will continue, and as it does, we will enhance our data set to correlate with survival rates, leading to valuable insights. Alongside this, our team is making progress with the FDA; however, no new timelines are available at this time. I don't foresee any issues regarding the study size, and while it will take time, I believe the necessary studies have been adequately powered, and our discussions with the FDA have been positive.

Salli Schwartz, Vice President of Investor Relations

Great. Thank you for joining us today. As a reminder, a replay of this call will be available in the Investors section of our website. This concludes our call, and we look forward to our next update with you and in the close of our second fiscal quarter of 2022.

Operator, Operator

This concludes today's call. You may now disconnect.