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

On day 3 of our Healthcare conference, I'm Tejas Savant, and I cover the life science tools and diagnostics sector here at Morgan Stanley. Delighted to have 10x Genomics join us this morning. And representing the company are; Serge Saxonov, CEO; and Justin McAnear, CFO. So welcome, gentlemen. Before we can get started, I have a quick disclaimer I need to run through. Please note, the webcast is for Morgan Stanley's clients an appropriate employees only. The webcast is not for members of the press. And if you are with the press, please disconnect and reach out separately. For important disclosures, please see morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales rep.

So with that Serge, just to set the stage, could you provide an overview of how for single cell and, more recently, spatial biology are adding depth to research. And in other words, I mean, what have these new research tools enabled for customers that they couldn't do before?

Yes. So it's actually hard to pick any specific -- any specific findings or any specific application because really, these tools are getting at one of the most fundamental features of biology. If you're starting -- the cell is the fundamental unit of biology. And if you're looking at tissues, how the cells and molecules organized is a fundamental question that pretty much impacts just about everything. We have now in excess of 1,500 publications that have come out peer review papers that used our products. And those span in the range, just -- I mean the full range of disease areas and areas of discovery, whether it's cancer, immunology, neurological diseases. And it also kind of spans basic -- very foundational basic discovery, where, especially in the early kind of initial introduction of single cell where a lot of work was focused on just mapping out the vertical Atlases. There are different cell types in human tissues, but now kind of progressing downstream to understanding particulars of various disease kind of etiologies and then to figuring out biomarkers to then finding out actually making -- drawing conclusions about therapies and kind of going into clinic -- sort of translational clinical applications. So it really runs the gamut along just about any axis you can consider.

Got it. Got it. And then diving into the single-cell side of things with your Chromium platform, you've quoted in the past sort of PCR and NGS instruments as a benchmark for the installed base. And both of them have essentially become sort of standard lab equipment for a lot of users today. What needs to happen to get chromium to those levels? And what are the bottlenecks you see in terms of driving adoption to those levels over the next few years?

Yes. So one thing I would just say, to be clear, because there is often confusion around that. We're not claiming that our instrument is going to replace real-time PCR or replace NGS sequencers. It does -- Chromium instruments do something things completely distinct from those technologies. It's more of that -- especially with real-time PCR is a nice existence proof that when we talk about our potential installed base, we're not like breaking the laws of physics, right? And so just to set that as a context. Now obviously, when you look at the number of biological research labs out there, that number gets into hundreds of thousands. And we -- our current installed base where Chromium is a lot smaller than that. And so there's tons of room to grow. Now in terms of what needs to happen. Well, so the one key thing that I think is important to recognize that what gives us optimism is that the value proposition is pretty clearly there, but there's a lot of different bottlenecks that for various types of customers, they still exist there. There's major ones around sample prop, for example, actually preparing whether it's cell suspensions or tissues for experiments and more sophisticated labs have for the most part, figured out those issues. But as you move out into the world of sort of your general biologist researcher, it was much more in the biological questions as opposed to technology development. That is still -- that's an open issue that needs to be addressed. Again, those are sample prop issues. On the other side of sort of the workflow, kind of in symmetrical fashion, you could think about bioinformatics and data analysis as being much more of a bottleneck, again, for much broader adoption relative to the initial more sophisticated customers. And then there's questions around just experimental setup, cost structures. Making sure that sort of the right -- the product integration fits the experimental needs of the specific customers. And so we're working on all of those issues ourselves to help, again, as we go further and further in the market to address those bottlenecks. And then there's the general kind of trajectory of market development that happens naturally. As more papers get published, each paper serves as a validation for a particular area for a particular type of experiment and also a recipe for others to follow, kind of also recipe for others to apply for grants. And so there's sort of this natural market development growth that we're seeing that -- to some extent, feels like previous technology adoption curves that we've seen before.

Got it. Fair enough. And do you see a scenario for Chromium where there could be sort of centralized sharing of the instrument amongst smaller customers? Or do you think the platform, the way it's set up is -- just there's limit to how much you can do on it? And so you need to buy multiple Chromiums even at the smaller scale.

Yes. Also -- I mean it's a good question. The thing is, it's actually, if you look at empirically at the trajectory of our adoption, it actually has gone consistently the other way, where when we first placed it Chromium platform typically starts out as either in the core lab at a particular university or there's this first instrument ends up being used by many different labs. But over time, what happens is that people who are using that instrument all around start getting their own because it's more convenient because they end up just like removing that sort of friction point of the hassle. That's what the customers like and certainly our salespeople like for our customers to like that.

Got it. Got it. Makes sense. You've announced a number of new panel launches. I mean you've got targeted gene expression solution. And I think you just announced earlier the Single-cell Multiome ATAC+Gene Expression solution as well. You've got the immune profiling panel coming in, I think, soon, right? Like 2 weeks or something.

Also, there's a couple of different things. There's the immune profiling version 2 products. So that's -- this is the next version of our flagship immune profiling product. And that is actually now in the market. We have started...

Nice. Got it.

Then there's targeted solutions for different products that we have, and those -- there's an immune panel. There's also cancer panel. There's a neurology panel as well.

Got it. Can you talk to us about sort of what's next in the panel pipeline? And how should we think about the impact of these launches in Chromium placements? Because -- I mean I'll tell you, from an investor standpoint, it's hard to really gauge which of these panels are targeting at very niche segments and which of these panels could actually have broad sort of like appeal and could be transformative to that adoption curve for Chromium.

Yes. So a couple of things. First of all, because of our -- like increasing just base of like revenue base, any new product launch is going to have less of an effect, like an immediate effect on our revenue relative to just the overall base. And that's going to -- like that dynamic just keeps kind of getting bigger and bigger as we tend to grow, obviously. So I would just caution from trying to read too much into new product launches and how much that affects the near-term revenue projections. As far as -- and then the next sort of [ deal in mission ] we want to make is that there is new product launches we're doing. So like Single-cell Multiome ATAC+Gene Expression is a new owned product, so is the immune profiling. But then in addition, we have now started our targeting applications and also the panels for the targeting solutions. Those are -- I would say that is nascent. We just started -- launched the product for single-cell gene expression earlier in the summer and the panels for -- targeting for Spatial for Visium is coming up imminently shortly. But it's way too early to actually assess or predict how it's going to sort of develop in the market, at least in the near term. We do see the targeting as a general approach is a very significant market expansion opportunity for us. And so as you start thinking to next year and beyond, it opens up really quite a lot of both new customers and new use cases. So moving from unbiased kind of fundamental scientific discovery, where you don't know necessarily what you're looking for, but now towards where you're asking specific questions, which is relevant for both biologists scientists, but also translational applications in biopharma specialty.

Got it. Got it. Now you launched Chromium Connect earlier this year. Can you give us an update on just how much the platform has resonated among your higher throughput biopharma customers?

Yes, I think the response has actually been quite good, quite robust in terms of interest and demand. The one thing that I would say that has been obviously a headwind for Chromium, for Connect, in particular, is COVID because it is a bigger system. It takes actual people to be on-site for the most part, install. And so when people aren't on-site, when it's hard to arrange logistics, that has been an issue. Having said that, I actually have been really impressed by sort of the creativity of some of our commercial people who -- like our support people figured out how to do some of the installs remotely, which is not something I would've expected. So again speaks to sort of the interest we have from customers. The other interesting point is that there's actually a bit of a tailwind as well because by virtue of COVID, people -- actually, it benefits not to have people on-site. And so walk-away automation that actually has become more attractive in the context of COVID. We're actually seeing some large academic centers being attracted to Connect for that reason.

I see. Got it. And then obviously, at AGBT, one of the launches that you announced was the 10x Cloud solution to shorten the informatics workflow on Chromium. And generally, what happens with sort of not just you guys, in the life sciences space is that the informatic side of things because it's not immediately monetizable gets undervalued by investors. So can you help us dimension sort of, first of all, how big this problem is today to your Chromium installed base? And then share some color on both how much improvement the 10x Cloud solution can drive for them in terms of shortening the workflow? And finally, just the feedback you've gotten on the solution so far?

Yes. So I'll kind of maybe start in reverse order. So first of all, so we announced that it's coming. It is going to be -- we're going to launch it later in the year. So it would still...

Got it.

Become available to customers. And it's going to be -- the thing I want to emphasize, it's going to be the first stage -- like a mini-stage process in the sense that it's the first step of many, as in we're going to enable some services for a select number of customers, and we're going to expand sort of the -- both the access and then features over time. This is kind of -- this is a product direction rather than a single product launch that we're establishing. Now going back in terms of how much interest is there in existing customer base in Chromium, so there's -- we've definitely gotten a lot of interest across many people, and it runs the gamut on people who just generally are, let's say, not super-sophisticated informatics, and they just want help to people who are sophisticated like core labs, but could really use a solution that would help them scale as well the customers because there's only so much help they can give to their -- everyone who's coming and then with -- asking for help. So I think it's going to where -- there's clearly a need and again, going back to bottlenecks that could be resolved by -- with existing customers. But I think it's even more important for our future customers as we think about the next 90,000 labs are we going to be selling to, those are much less sophisticated than the first 2,000, and this is where it's going to be particularly important. And you're absolutely right, 100%. This informatics and software tends to be consistently under-scoped generally in our tools space. And certainly, because it is an area that's hard to monetize directly, it tends to be under-invested, underappreciated. But it is -- so we took a very different stance from the very beginning from kind of the founding the company, where we intentionally invested in software and informatics. And I think that has been part of the reason for sort of the successful adoption of our product is precisely that we have great solutions there. Again, initially, they've been oriented toward the more sophisticated customers. But going forward, we're going to be building up more and more of the capabilities specifically for the different for your kind of general biologists and different applications and less sophisticated computation.

Got it. Makes sense. And then so switching gears to Visium. I mean obviously, a very strong launch. You announced over 600 labs using the solution as of the second quarter. Can you give us some color on the mix of new customers in there? And how much cross-selling are you seeing across the 2 platforms today? And how you expect that number to evolve over time?

Yes. So it is important to appreciate that our strategy, right, with Visium launch, which we started shipping last November, end of around Thanksgiving, has been very much focused on our existing customers, Chromium basic research sciences. And the amount, roughly 80% of our sales, that has been fairly consistent, have been coming from that group, right? This is our market, too. And so cross-selling from Chromium to Visium is fairly natural. They're like quite complementary and good. But the thing that has been somewhat surprising and ahead of our expectations. We knew there was going to go there, but the interest came at us much sooner than we expected as translational researchers, more clinically oriented kind of places. And that's about 20% -- the balance of 20% are kind of new customers. We haven't really -- I don't think there's an appreciable really either time or effort that we've spent trying to cross-sell Chromium to those customers. I don't think that's necessarily our focus at this stage yes. So that's where kind of things stand numbers-wise.

Got it. And then just from the point of view of your competitive positioning within the market, you obviously have been focused heavily on the discovery side of things. You started to getting more and more interest on translational -- on the translational research front. There's NanoString's GeoMx on the -- who's out there today, but there's also a whole bunch of other sort of instruments waiting in the wings, I mean there's ReadCoor, Miltenyi, Akoya and others. How do you see the competitive landscape evolving? And how do you expect to position Visium within that competitive landscape so that you guys can continue to punch above your weight?

So one thing that I would just emphasize is I think the -- it's a very large space, spatial kind of tends to cover a lot of different technologies. When people talk about it. And for the most part, these are not really competitive and more complementary, if anything. I would say with regard to NanoString, specifically, I think traditionally, we've been -- there hasn't really been a lot of direct competition. I think going forward, there's likely to be more because they're building out, obviously, kind of the discovery channels that are moving more into our kind of unbias panels that are moving to our sweet spot. And clearly, we are developing target applications on -- so traditional earn the products. There's going to be, I think, more competition starting at this stage and going forward. Platforms like Akoya or ReadCoor and others are a bit -- sometimes it's hard to tell precisely where -- how mature those technologies are. I think the future -- when you look to the future, it makes some of them look really good in principle and very exciting. I think a lot of them also -- again, when you think about Akoya and ReadCoor, kind of maybe belong in the realm of closer to techniques like FISH and IHC immunohistochemistry, which is sort of the way that pathologists have been looking at tissues traditionally, looking at some number of analytes, but now with -- especially with ReadCoor, there's potential to scale those by orders of magnitude, the number of molecules analytes you can look at. And Akoya's kind of pursuing similar direction. So again, we see all of those techniques as largely complementary to Visium at this stage. And I mean, we were super excited, Visium has the reason we invested it into the first place. It has tons of potential to go in all the different directions. For us, the question is continuously has always been and it's going to be for a long time, it's just prioritization. What the -- which features which product directions are we investing at any given time.