10x Genomics, Inc. (TXG) Earnings Call Transcript & Summary

Good morning, everyone. My name is Tejas Savant, and I work on the life sciences team at JPMorgan. It's my pleasure this morning to introduce Serge Saxonov, Founder and CEO of 10x Genomics. At the end of Serge's presentation, there will be a breakout with the management team in the Olympic room, that's outside to your left. And with that, I'd like to hand it over to Serge.

Thank you. So please note that a webcast of this presentation and our 10-Q are available on our website. During this presentation, we may make forward-looking statements to which you should not place undue reliance. We disclaim any intention or obligation to update or revise any of these statements. Material risks and uncertainties may cause actual events to differ from those anticipated. Additional information regarding these risks, uncertainties and forward-looking statements can be found in our filings with the SEC. Last year was, once again, a big year for 10x. Our revenues continue to grow rapidly. We had $170 million in the first 3 quarters of the year, which represents 75% growth from the year before. We now have over 1,500 instruments installed around the world, each of which is pulling in an average $150,000 of annual consumable revenue. And we now have over 700 publications that have come out of our customer labs, a number that's more than double where it was a year before. Now we've come really far since starting the company 7 years ago. But what's really exciting to us is the sense that we're just getting started. And much of the reason for our optimism is the vision we have as a company. This is the century of biology. Some of the greatest value creation opportunities in the history are ahead of us. Things like curing cancer, like addressing infectious diseases, like figuring out Alzheimer's, all of these advances are going to become tangibly possible. Now they're not going to happen tomorrow, but they are going to unfold over the coming decades. And the biggest obstacle -- the biggest challenge to making these advances a reality is the fact that we actually understand very little of the underlying biology. The amount of biology we don't know and don't understand is vastly greater than what we do understand. And the crux of what actually makes biology so difficult and so challenging is its inherent complexity. Each one of us has close to 40 trillion cells, each one of those has this enormously complex genome that codes for trillions of molecular pieces interacting with each other in a myriad of complicated ways. And ultimately, the only way to address this complexity in order to achieve understanding it -- is through scale. You need to be able to measure all these objects, individual cells, individual molecules, their combinations at massive scales and massive numbers. And now while the modern age of biology started roughly in the middle of last century, it wasn't really until the advent of genomics as a discipline that people have started looking at biology at the right level of scale in a systematic fashion. First, with the Human Genome Project, followed by genome-wide association studies, followed by population sequencing, and the focus here has been squarely on DNA. First, compiling all the genes and all the variants, essentially the initial parts list of human biology. But now going forward, we need to understand what those parts actually do. And that means the genomics, broadly defined, needs to expand outside to encompass the rest of biology. All the downstream analytes like epigenetic programming, like gene expression, like proteins, cells, tissues, tissue architectures, you need to be able to measure all those elements at the right resolution at a normal scale. Now to give you a sense of what I mean by resolution of scale. On the left is how the world has been measuring gene expression up until a few years ago, where you take a tissue and mix all the cells -- the content of all the cells in the tissue together and then measure that mixture. What that effectively gives you is that single data point on the left, the average profile across all the cells in that mixture. But now with our products, for the past several years, our customers have been able to measure individual cell's full transcriptome profile of each cell across thousands and tens of thousands of cells in a single experiment. And now you see the true complexity of the underling biology merging, which leads to vastly more understanding that could have ever been possible before when you're looking at the world through this obscured view of low resolution and low scale and averages. Now this quantum jump and understanding that happens, you can see the evidence of that in the publications that have come out of our customers' labs. Earlier, I mentioned the number 700, but what's even more gratifying to us is to see just the sheer diversity of areas of biology where our products are being used, from oncology to immunology to infectious diseases, reproductive health, neuroscience, it's actually hard to think of an area of biology where our products are not making a fundamental impact. And it runs the full gap from like very basic fundamental discovery to understanding human diseases, to helping develop new therapies, to figuring out how to match the right drug to the right patient based on their molecular profile, which is the ultimate goal of precision medicine. Now with our products, we strive to provide complete solutions. Starting as early as possible with a customer sample going through the laboratory workflow, through data analysis, through visualization to get as close as possible to the answer that our customer, the biologist, is looking for. We sell instruments that present a source of upfront revenue, and then we sell consumables that presents a source of recurring revenue. These consumables comprise reagents, enzymes, microfluidic cartridges. Our customers buy different sets for different applications to measure different analytes. This is a cooling system, so the customers have to buy these consumables from us and then we provide the software for free to complete the full solution set. Since the very beginning, we've been on a rapid pace of new product launches, new product developments, new features. It took us less than 3 years to go from starting the company to shipping our first product. And if anything, we have been accelerating since that point. All of our products have brought new levels of scale and resolution to measuring different biological analytes for our customers. And this capability, this innovation engine, the ability to develop new breakthrough products at rapid velocity and also knowing which products to build, we see that as a core pillar of our competitive advantage. This is something that we invested intently and from the very beginning and have continued to invest throughout the years. And we'll continue to invest aggressively going forward because we have so much and so many more opportunities ahead. Our products are organized around 2 core platforms. First, the Chromium platform, which is the one that has enabled a single cell analysis I was mentioning earlier. This is the one of which there's 1,500 -- over 1,500 instruments around the world. With that, our customers have been able to say what is happening in their samples at the right level of resolution, the single cell resolution. The Visium platform, which we just launched, provides answers to a complementary set of questions. Where is it all happening? How are the cells and the molecules arranged with respect to each other in tissues? This is the question of spatial analysis. So first with Chromium. At the highest level, what Chromium allows you to do is run a huge number of reactions in parallel. For single cell analysis, you will start with a cell suspension. That would go into microfluidic cartridge, which would then go into the instrument. And then within the instrument, each cell gets partitioned into its own little microdroplet. And then within each droplet, you run a special biochemical reaction specific to the particular analyte you're trying to measure, whether it's DNA, RNA, epigenetics, proteins, and you record the results of that measurement within DNA fragments. Those fragments after you dunk -- you combine all the droplets together, and then you can -- you have a solution of those DNA fragments that can be sequenced on a conventional DNA sequencer. Now the vast majority of our customers don't actually have a DNA sequencer. Rather, they sent off their samples for sequencing in the third-party service provider or core lab or a lab next door. But our instruments, the Chromium instruments, was -- naturally belong where the experiments are being done, right there on the lab bench, right where the samples are in a very decentralized fashion. Once the sequencing is done, the data comes back at -- back to the customer to their lab, gets processed using our software and gets visualized at the customer side. The Visium platform works in a very analogous fashion. But perhaps one of the most notable difference is there is no instrument. The core technology is based around special microarray slides. You would start with the slice of tissue. That tissue would go on to the slide, and each slide has thousands of little micro spots, each comprising DNA fragments sticking out of the surface. And those DNA fragments are meant to capture RNA molecules out of that tissue. You will then run the biochemistry reaction to generate a solution of DNA fragments, where every DNA fragment contains information from an RNA molecule in the tissue, and also a special code that corresponds to where that molecule was on the slide. You then send off that solution -- again, solution of DNA fragments for sequencing. The data comes back, gets processed and visualized using our software to produce these beautiful pictures of gene expression across tissue slices. Now we launched the very first product on the Visium platform for measuring gene expression at the end of last year. But this is just the first product. There is many more we have in the works for measuring different biological analytes and also making a lot of fundamental improvements to the capacity of the platform itself to keep increasing its fidelity. Turning to customers and markets now. As I mentioned earlier, it's actually hard to think of an area of biology where our products are not being used. And their use keeps increasing across all these different areas. Now this presents a challenge to precisely quantitate the size of our market. There's not a predicate for what we're doing. We're not replacing any particular thing, rather we're drawing dollars and customers from all across life science research. We are creating new markets. And while there's not a very straightforward, precise calculation to get the size of the market, there is 2 different ways we have been using to triangulate on the size of this opportunity. First, with all the products that we've launched over the past several years, we are essentially sweeping away much of the conventional toolkit of standard biology, whether it's protein biology, molecular biology, cell biology. And so then if you think in terms of potential for instrument placements, you need to start thinking in terms of the potential that goes into every kind of lab, ultimately in every lab -- every lab bench. And in fact, that's how we designed the instrument from the very beginning in terms of its form factor, in terms of the score structure, in terms of the workflow, to go in every lab bench. Now while there's not a predicate for an instrument with that kind of a variety of potential uses, one lower bond proxy that we have considered is real-time PCR. Now these instruments provide -- allow their customers to measure DNA and RNA concentrations. It's a particularly -- it's a fairly narrow use case, but nevertheless, these instruments achieved a wide degree of adoption, 50,000 placements around the world. We see that as a lower bond and the potential for the Chromium system. So we could get to that point and potentially quite a bit larger because, again, the universe of use case is so much larger for Chromium compared to just about anything else. You can look at the market from the other perspective in terms of the total dollar spend in the ecosystem. The whole size of the research tools market was $50 billion in 2017. If you zoom in to just those areas where researchers are already pursuing high-scale, large-scale, high-resolution research like next-generation sequencing, like flow cytometry, like microarrays, we see that those areas, those customers are particularly amenable to adopting our technology. And we see that, that $13 billion is the size of our opportunity right now. Over time, as more researchers, more scientists convert to this new way of conducting research at large scale, high resolution, we see more of this $50 billion becoming available to us over time. And one important thing to note here is that all of this analysis is restricted entirely to research tools only. At the same time, there is no doubt in our minds that these kinds of technologies will be absolutely foundational for the development of many new therapies in the future and for how we do clinical diagnostics in the future. Now from the beginning, we appreciated the size -- the enormous opportunity in front of us. And we set out to build a fully scaled global commercial organization. Early on, we focused on key opinion leaders. Those are the customers, the scientists, who are the frontiers of biology, who are early technology adopters, who others follow. We nurtured those relationships and they provided a great foundation for market expansion. And now we've expanded well beyond that initial group where we have over 1,500 instruments around the world. We have more than half of our -- close to half of our sales coming from outside of the U.S., and no customer is more than 5% of our sales. A core pillar of our commercial strategy has been to focus obsessively on customer success. To that end, we have well over 50 support scientists whose main focus is to get new customers up to speed and going with this new technology, with this new science. We also have extensive materials on our website: videos, protocols, tutorials to help our customers through their journey so that they're successful ultimately in their science they publish, which draws more customers into the ecosystem, which drives more usage. Our customers, as I mentioned earlier, spent about $150,000 per year per instrument on consumables. But that represents just a tiny fraction of the overall capacity of the instrument. In fact, we have many customers who spend multiples of that amount. When we place a new instrument at a new lab, what typically happens is that, that instrument attracts, generates attention from neighboring labs, from other labs around the campus. And those people start using that instrument. Eventually, they buy -- start buying their own reagents, eventually many of them actually buy their own instruments. And you see this happen -- this dynamic happen time and time again. You have a new placement at an institution and, over time, that mushrooms into a whole constellation of Chromium systems all around the campus. And just speaks to the fundamental and decentralized nature of our system, where it does belong in every kind of lab, on every lab, ultimately on every lab bench. Our commercial infrastructure has been the great foundation for global expansion. We have now well over 200 employees in our commercial organization, spanning sales, support and marketing. We have direct sales in North America and Europe. We have a hybrid approach in Asia Pacific, where we use our distribution -- local distribution partners together with 10x employees on the ground to develop those individual markets. And now this commercial infrastructure and our market-leading positions have emerged as another core pillar of competitive advantage to complement our innovation engine because it provides the means by which we can take these awesome products coming out of R&D and get them to massive market adoption. It also, through the close partnership with our customers, provides us the view into what's happening next, what are the customer needs, where are the frontiers of biology? Where is the science going, and feed that back into our product development engine to keep building new, awesome products, to keep increasing our market lead. The third pillar of our competitive advantage is our intellectual property portfolio. From the very beginning, we focused on filing patents around our core technologies as we're inventing the initial platform. As we move -- as we expand into new areas, new applications, we expanded the portfolio to go along with that. And so these 3 mutually reinforcing pillars of competitive advantage lay a great foundation for our future expansion and growth. And we continue to invest aggressively in R&D because we see we're just getting started. There are just a wealth of opportunities ahead of us. And so now we'll go through and cover some of the capabilities we are working on internally. Over the past several years, we launched multiple products to measure different analytes in single cells. We have products for measuring gene expression RNA. We also have products for measuring epigenetics using a technology called ATAC-seq. The single biggest request we have gotten from our customers is to be able to measure those 2 analytes together from the same cell. And the reason this is so important is because it goes to the heart of one of the fundamental questions of how information is processed in human biology. Your DNA is pretty static. Your genome is, for the most part, the same across all your cells. How the genome is used to generate the vast diversity of cells in your body, that's determined by epigenetic programming. That's what makes that genome -- the same genome into a blood cell in one instance, and into a muscle cell in another, into a neuron in another. And so epigenetic programming is at the heart of driving a much basic human biology. It's also involved in a range of human diseases like cancer, inherited diseases, conditions of old age. And so for the past year, our customers have been able to measure, to read epigenic programming across large numbers of cells. But the next challenge, the next question is to understand what does that actually mean. How is the programming, the rules of the programming? And to do that, you need to be able to both read the program and measure its output, which is -- what you need to do is be able to end up with this gene expression, RNA. And that's precisely the capability we're going to be launching with our next product, where our customers for the very first time will be able to read both epigenetic programming using ATAC-Seq and RNA gene expression across thousands of -- tens of thousands of cells at a single experiment. This could give -- our customers have been intensely interested in this capability because it will allow them to start cracking the rules of cellular programming, and with it -- one of the most fundamental challenge to addressing human health and disease. Since ushering in the single cell revolution, one of our core tenets has been that this way of doing science and research really belongs in every lab out there. And while single cell research has been transforming the way that science is done across thousands of labs around the world, our next goal is to enable this approach, this new technology for tens of thousands of new labs, tens of thousands of new potential customers who are just starting to get intrigued by this technology. And to that end, we're going to be launching 2 new capabilities to make single cell experiments less expensive and more flexible. First, we're going to enable targeted sequencing for our customers so that instead of sequencing the full transcriptome of each cell, they'll be able to sequence just a subset of genes, and thus dramatically reducing the cost of sequencing and significantly decreasing the cost of overall single cell experiments. We will also launch new special multiplexing reagents that will allow our customers to pull multiple samples together onto a single 10x lane, thus greatly increasing the number of available samples for single cell analysis and also making previously impossible experiments viable. The single cell revolution took off in 2016 when we launched our Chromium platform because it allowed for the first time for our customers to run 1,000 cell experiments routinely. Since that point, we have helped our customers scale to 10,000 cell experiments to the point where many labs are actually running routine 100,000 cell experiments. But biology is very complex. And the way to address that complexity is through scales -- scale. And so we have now been hearing from our customers, they need sequence million -- to do millions of experiments. And over the next 2 years, we'll be bringing up multiple features, capabilities and products to enable that, where our customers will be able to run routine million cell experiments. And in fact, we see the future going well beyond that, where we will bring our technology to the point where we can do 10 million cell experiments. This will transform many of the applications where single cell analysis is currently used. It will also open up big new areas like enormous drug screens, like massively parallel genome pathway studies, like large-scale cohort and population scale studies at single cell resolution. Now turning to Visium. With Visium, we brought the world of high throughput molecular analysis to tissue slices and pathology workflows. And the standard way that pathologists analyze their tissues is using IHC, immunohistochemistry, which allows you to measure a small number of protein markers. And now with this new capability that we're going to introduce, you'll be able -- our customers will be able to do both, the IHC and Visium gene expression from the same tissue, from the same sample, at the same time. This will significantly increase the information content that our customers can get from their samples, but also importantly will serve as a bridge from the traditional world of pathology to this new high throughput way that we are bringing to the world with Visium. And so they're a great facilitator for further market adoption of the platform. Now IHC is great for measuring one protein marker, maybe two, but it really can't scale much beyond that. And so to address that fundamental limitation, we're going to be bringing our feature barcoding technology to Visium as well. With feature barcoding, you can measure very high plex levels of protein targets using oligo-tagged antibodies. The graph on the right shows an experiment that's measuring 12 different protein targets, together with full transcriptome gene expression at the same time. And in fact, this kind of technology can be pushed further to the point where you could be measuring hundreds -- potentially even thousands of target -- protein targets at the same time together with gene expression on the same sample. So this capability promises to be transformative for what kind of information we can get from our biological samples and tissues. And finally, with our Visium product, our focus has been very much in basic science, foundational discovery research. At the same time, we have a lot of interest from translational and clinical researchers. And for them, the most important type of sample is formalin-fixed paraffin-embedded, or FFPE. The reason it is so important to them is because this is the standard way that patient samples are collected and stored in human pathology. Now FFPE is fine for visualizing tissues, it's absolutely awful for the kinds of things it does to molecules in your sample. And the Visium product was not designed to FFPE. At the same time, internally, we have now developed the capability for the platform to do just that. So you see this graph in the middle shows an example of a Visium readout of our recently fixed slice of a mouse brain. And the graph on the right shows an old sample, 7-year-old archival sample of an FFPE fixed tissue over a breast cancer tissue slice. So this shows that fundamentally, this Visium technology can be made to work with FFPE. And in fact, we're going to be releasing this as a product in the future. Now I've given you a glimpse of some of the capabilities that we've been working on, but this is just the beginning. Because our goal is to build out the ultimate set of technologies for measuring biology and making them available to everyone, whether for academic research, development of therapeutics or treating patients. Because in the end, given any biological sample, you should be able to measure every analyte of relevance at the right resolution with all the necessary context because that's how we will achieve understanding, that's how we will arrive at cures. Thank you.