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. [Operator Instructions]. 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 have 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…

Thanks, Francis. As discussed, third quarter 2020 revenue was $794 million, the 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 and $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 1000 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 region's, Americas 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…

Thanks Sam. As the global leader for sequencing platforms and consumables, we've seen our products enabled 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 the 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, incorporating 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.

[Operator Instructions]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Schenkel with 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 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 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 kind of 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 use it as a reason to buy no receipt. 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 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 aim to do, and we saw, the effect in the quarter was really catalyzed 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 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 are moving to insource. And I talked about an example of that in the prepared remarks. The other thing that this release was intended to do was catalyzed 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. So that could be on HiSeq, for example, or they 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 cycles 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 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 plan 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 a year-over-year declines, especially given the pandemic, given some pause on instrument purchases. But as we look towards Q4, we're expecting growth and 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. 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, with regards to OpEx, I would add just maybe a couple of points. And thanks for the question by the way. The one thing I would say is we've been incredibly focused and diligent in terms of managing our operating expenses, but at the same time really focused to Francis's point about not in any way undercutting our innovation -- our investment in innovation and in any way impacting our R&D pipeline. But for three quarters of the year, up until the end of Q3, I would say we're about $150 million below our own internal budget in terms of operating expense. So we have been very careful in terms of managing operating expenses. We're about 10% below. And as we look forward, yes, there will be some things that start to ramp back up. Things like again, as employees come into the lab, we will have R&D projects start to scale back up. That will continue into next year. And we'll have certain expenses as hopefully this pandemic eases like travel, that increase as well. But I would say in general, we've been extremely diligent and disciplined in terms of managing our expenses through year today.

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

Hi, Francis. Thanks. And Sam, thanks for providing comments on 4Q, as well appreciate that. First question, recently, just within the last 24 hours we have been locked down in France and Europe. And these lock downs can potentially spread. Just wondering if that's contemplated in your expectations for the fourth quarter? And also, do you expect customers in Europe to be more adaptive this time around in terms of managing research and diagnostic sequencing operations now versus before? I just wanted to get your thoughts on that? And given that sequencing run rates that you described earlier as 96% of pre pandemic levels? Could we see a different standard here? And is this baked into your guidance? And then if you -- second question, if I could ask around GRAIL. One of the key questions that have emerged last week -- since this week, actually is the approach that Illumina took to GRAIL acquisition in light of another multi cancer liquid biopsy acquisition this week. I totally recognize that the acquisitions are pre revenue, but it appears that GRAIL is valued significantly higher versus thrive. So could you elaborate, if there's anything in terms of the overall market opportunity of the pre pen cancer test, or technical performance in the gallery or scale of studies or anything here that gives you a greater confidence and a higher valuation? Appreciate it.

Yes. Thanks, Puneet. So I will start with your question around the potential restrictions in Europe, maybe even the U.S. As we mentioned on the prepared remarks, we're monitoring that 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 adapt? I do think they are getting a bit more adapt 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, and 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 have 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 health care 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 4Q? And assuming that things do get going there, you thinking 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 starts with All of Us. For all of those, we expect the All of Us samples to start flowing to partner genome centers in Q4 and to start to see both sequencing in 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 [Indiscernible] setup, workflow has been setup and machine is going into like. And 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 thing, I would say 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 instruments placements as well, in China, which bodes well for future activity. And so, pleased with the clinical performance there for sure. And 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 add some destocking in the second quarter. Did some sort of a restocking dynamic here play into that 29% quarter-over-quarter growth. And then an 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 destocks 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 to 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 a proof 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 fail, 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 razor blade model, and 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. So let me touch on both and then add some color. If we saw on GRAIL, yes, we are expecting the deal to close in the second half of 2021, as we go through the regulatory process. We've talked a little bit about the dilution associated with GRAIL. But frankly, we'll have more information for you as the deal closes. And again, that's the second half of 2021. In terms of the instrument placements, we -- obviously, you're right, it is a razor blade model. And that's why it's important -- that's why we're so encouraged by the recovery we're seeing in instruments placements after we got out of Q1. And so the strength in NovaSeq placements to Q2, Q3, and certainly the pipeline, as we walk into Q4 is a very important. Similarly, the strength that we're seeing in the mid-throughput part of the portfolio, specifically NextSeq, both the new NextSeq 2000, as well as the 500 and the Dx boxes are a good sign for us as we look going into 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 [ph] 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 that 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 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 about that. They're generally consistent with what we expect. And so we don't expect the final study results get published next year are then 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, it's fast. 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 slipped 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, 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 have 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 it actually they entered the year, equencing 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 took samples of are 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 and 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, philosophically change any of your thinking around base Illumina budgeting as you roll into 2021? Thank you.

Yes, thanks, Dan, for the question. So with regards to gross margin first of all. The downtick from Q2 to Q3 was really expected for our expectation. So, gross margin came in at slightly better than our expectation. And that was driven by some additional -- we have some additional freight expenses, some additional compensation expenses in our operations organization. And also some of the ramp on the project as well had some additional impact on gross margin or cost. So that's perfect our expectation. The Q4 downtick sequentially versus Q3, it's really mostly driven by mix. And the fact that we have a instrument quarter that's strong, that outweighs some of the benefits from the consumables, mix is impacted negatively by that. With regards to the expectations for 2021. Really, when we think about the core business and Illumina, there's really not a material change in terms of our budget, philosophy and approach. We are absolutely focused on continuing to invest in the core business and also generating the shareholder returns that we were committed to end the core business, to continue to drive, support that over time. But at the same time, we have a really compelling opportunity with GRAIL, and we're going to continue -- we're going to invest behind that opportunity. It's going to be diluted in the next few years, but we're committed. So not a major change in terms of our budgeting philosophy for 2021 on 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. Sure, David. So maybe I'll start by saying that. As we entered this year, we talked about the fact that clinical business represents just under half of our sequencing consumables. But we also talked about the fact that that part of our business is growing significantly faster than the research side of our business. And so, you should expect those lines to cross and once they cross they aren't going back. The sequencing consumables from the clinical business is going to be the majority of our sequencing consumables both in dollars and in growth going forward. Off those sequencing consumables from the clinic, oncology testing for therapy selection represents the biggest part of that market. And so, we haven't -- you should expect that to continue going forward. You have long term numbers there, but you should expect that to continue to be the biggest part of the sequencing tools in the clinic going forward. We do expect for a number of reasons to continue to see the migration from hotspots to larger panels, and frankly, from not just hot, but the smaller panels to larger panels too and that's driven by in a number of things, including the increasing use of TMB, as a biomarker for therapies. And so, if you look at what happened with Keytruda for example, in the last few months, that continues to add momentum to say, it's not enough just to look at gene hotspots to prescribe a therapy, but you need to look at things like TMB, and that will require the use of larger panels. And so, you take that. You take the fact that you're seeing. When and I talked about ASMO, for example, you're seeing momentum and guidelines to use biomarkers like TMB. And all of that will continue to drive momentum to the larger panels, which will then drive more sequencing and will make oncology testing grow even faster, and therefore be a bigger component of the sequencing consumable revenue going forward.

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 are early tracks and 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 are still primary 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.