Francis deSouza: Sure. So Dan, in terms of the GRAIL process, we are expecting the divestiture order to come out at the end of Q1, so maybe beginning of Q2. And we are going to apply, if there isn’t a stay associated with it pending the appeals, we’re going to ask for one. And then we’re going to pursue the dual track and we’d be pragmatic as we go down both paths. On the 1 hand, we’re going to have a divestiture track where we work with the European Commission GRAIL and go down the path to — on the divestiture sort of process. And we expect that to play out over the course of this year going into next year. And in parallel, we have our appeals, and we have 2 appeals underway. One is around the jurisdiction, and we expect a decision probably towards the end of this year and another one is on the prohibition order, and we expect a decision maybe towards the end of this year, maybe sometime into next year.
And so those are the 2 paths. In terms of the capitalization, part of the divestiture track is going to be around making sure that GRAIL is capitalized going forward. And that could be through a combination of strategic partners that invest in GRAIL. That could be a path. It could be a multistep path that includes initially investment into GRAIL from strategic partners heading towards an IPO. But all of that is dependent on what comes out in the divestiture order, and that’s something we’re still in conversations with. So we’ll keep you updated as that makes progress.
Operator: Our next question comes from Dan Arias with Stifel.
Daniel Arias: I wanted to touch on GRAIL, too, if I may. Joydeep, on the dilution for 2023, the $670 million, I’m just curious how much flexibility you have to work with in that number and the investment associated with that number. Just with the point being that, obviously, the forecast for Galleri is tough to call at this stage in the game. So to the extent that the revenue picture were to start to look different down the road, I’m wondering just how much of what you might have to spend there might be variable in one way or another. And then Francis, on the GRAIL NHS project and part 1 of that study, the 140,000 asymptomatic population assessment. The documents from the NHS, if I remember correctly, stated that the initial results were expected to be available in late 2023. Is that still the time line we should be thinking about? I mean I’m just — I’m thinking about your comment on potential IPO and just outcomes there and what might be important to that process.
Joydeep Goswami: All right. Dan, thanks for the question. So in terms of the GRAIL dilution of about $670 million this year, right, a couple of points there. So a lot of that is going towards continuing to accelerate some of the clinical trials in advance of completion of the NHS trials, the submission to the FDA for the Galleri products and, of course, to ramp up the sales and marketing that is required as the product continues its successful commercial launch, right? They’ve had a really successful commercial launch. The way we have projected revenues into next year and based on — it’s really based on the run rate that we have seen with Galleri as they have exited 2022 and some of what they had in the funnel into 2023 and certain assumptions of repeat testing around that.
So given that, I will point out, and again, I will say that GRAIL is held separate, so Illumina and Francis and I don’t really control their — how they spend their money and how they operate the company. But I will point out that in 2022, they have been very good with how they’ve managed to adjust operating expenses as revenues have been different from what their — some of their original expectations were. So we have faith in GRAIL’s management that they are — they’re good managers, they’re good with how they allocate their money into the right places that really prioritize the clinical trials and the commercialization of the product.
Francis deSouza: And then, Dan, I’ll respond about the NHS contracts. As you pointed out, the GRAIL team has a contract with the NHS that covers the 140,000-person clinical trial that is underway, but also covers the next phase pending performance of the trial. And so they’ve already got an agreement with the NHS that if the trial meets its performance criteria, that the NHS will roll this test out to 1 million participants in the U.K. over 2024 and 2025, and that will be paid for by the NHS. The time frame for that readout is the end of this year, maybe the beginning of next year. So it’s still the time frame that was contemplated in the contract.
Operator: And we’ll move on to our next question with Vijay Kumar with Evercore ISI.
Vijay Kumar: I had a 3-part question here. Francis, one on revenues. If you look at Q1, I think the implied guidance, teens declines. So I think the back half implied is north of 20% year-on-year revenue growth to hit the high singles to low doubles for the annual. What gives you that back half ramp here when I look at this on a year-on-year basis? I know you mentioned the historical launch year as a comp. But can you just walk us through on the visibility you have on those numbers? And Joydeep, one on margins here for you. Why did gross margin decline sequentially Q-on-Q when I look at Q4 versus Q3? And if you start in Q1 at 17% op margins for core Illumina, is the implied exit rate for core Illumina in the high 20s when we look at Q4 ’23?
Joydeep Goswami: Listen, let me start and I’ll give you some piece in terms of back half ramp on revenues, right? So let me start with the first half — the first quarter and first half, right? We had very strong quarters in 2021 for the first half. We had record shipments of NovaSeq 6000s, if you remember, at the beginning of the year, still ramping COVID surveillance revenues. So this year, because in Q1, we are — we’ve said we’re going to ship about 40 to 50 NovaSeq Xs, which is far short of what our demand is for that. You would expect that the first half of the year, growth rates are constrained as we ramp up NovaSeq X and we ramp up consumables purchases related to that. In the second half of the year, the story kind of flips a little bit, right?
So you have much more kind of full — approaching full throttle of NovaSeq X shipments. You have the incremental benefit of people bringing on NovaSeq X consumables. You also have some of the effects, which were headwinds this year, in terms of China COVID, in terms of overall COVID surveillance going down in the back half of the year. So you’re right, the percentage growth rates in the latter part of the year and the actual revenue both start to step up in the second part of the year. So hopefully, that part is clear. In terms of margins, so let me talk about gross margin first. Gross margin declines quarter-over-quarter and, of course, this being a launch year, primarily due to the impact of — especially if you look at quarter-on-quarter, is really due to the impact of launching NovaSeq X in Q1, which, as we had told you, would start off this year with a lower margin.
We expect that margin to continue to improve as we go into the latter part of 2023, as we have much more utilization of the factories and, of course, we start squeezing out efficiencies in the process, as is normal. And I think the same thing with operating margin. I think your question there was, you start off with a fairly low operating margin. For us, it’s — as both gross margin and the revenue profile improves, operating margin should improve as we go into the second half of the year. And that’s mostly just math in terms of much better revenue profile to cover operating expense, which remains relatively flat as we go through the year. So hopefully, that helps you understand a little bit of how we’ve thought through the year.
Operator: And our next question comes from Tejas Savant with Morgan Stanley.
Tejas Savant: So 2-parters here. First on GRAIL, Francis, just going back to Dan’s question there. Can you talk a little bit about how much of that $670 million in OpEx this year is specifically related to that NHS clinical trial that presumably drops out starting in ’24? And is there the possibility of a delay or a period of evaluation as the results come in from that before that 1 million paid pilot launches? And then second on NovaSeq X pull-through assumptions, if I look back to the 6000 launch, you guys were approaching almost 1 million in pull-through about 6 quarters into the launch. So is there any reason why you couldn’t sort of easily exceed that, say, 6 quarters into the X launch or the back half of ’24, should that number be sort of 1.3 million, 1.4 million-plus. Is that fair?
