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

Okay. Welcome back, everybody. This is the life sciences track of the 2020 Stifel Healthcare Conference. Our next company with us today is 10x Genomics. We are happy to have Serge Saxonov, CEO; Justin McAnear, CFO, with you -- with us. Thanks, guys, for doing this session here today.

Thanks for having us. Glad to be here.

Yes. Sure.

Okay. We have 30 minutes. I felt like a good way to go about it, we just need maybe touch on the quarter a little bit. There are some items on the new product side and just some of the things you've announced recently I'd love to go through, if that's all right with you.

Maybe starting with the quarter, a big sequential step-up in the top line, which certainly is good, given where the academic customer base has been and seemingly going to. So can you just maybe touch on how the business is trending? And maybe ups and downs on COVID. And then with COVID as an application, how would you describe what it is that you're seeing in terms of single-cell work that's being done there?

Yes. So the story of the quarter was really kind of return to general -- of general demand. Much less so, I would say, it was about COVID, specifically, but more just researchers getting back into the labs and figuring out how to run experiments. So it's important to appreciate here is that people are figuring out there's -- the labs are not back to the same modes of working as they were before the pandemic. There's all kinds of logistical constraints, no kinds of issues that people are dealing with. So not having the same number of people in the labs, working at shifts, not being able to move to in floors. But within those constraints, people are figuring out around their experiments. And so that has been really the source of sort of that bounce back that was all in Q3. And we expect that to continue going forward, not to the same sort of the rate of that bounce back. Obviously is not going to be the same as it was from the depths of the pandemic going forward, but again, people are figuring out how to work within these new constraints. As far as actual COVID-related applications, specifically, so we definitely saw a lot of interest, a lot of work of people jumping in back at the very end of Q1 throughout Q2 of getting instruments, running experiments to understand the -- all the different features of the infection and kind of drive the science forward. It's -- and so that has been -- but I would say that the tailwind from that is quite minor relative to the general kind of research return. And we -- while we are -- certainly, we've done -- we did everything we can. We're quite encouraged by the amount of COVID-related research that was done using single cell, using our products. It's not that at the scale of other things. I do want to point out one element here, though, is like infectious disease research, in general, was not a huge area for us before COVID hit, but it has now emerged as a new substantial market going forward. And I think that's a permanent shift.

Yes. Okay. Maybe just to stay along this line of the type of work that's going on amidst COVID, I mean, I hear what you said. To your point, it's not a COVID play, by any means, but there is a lot of biology that's being explored related to COVID with your products. Can you just talk quickly on the v2 product for the immune profiling, yet how much of that -- however much that is, how much of that is COVID related? And where should I think outside of COVID about that really being deployed the most?

Yes. So while it definitely kind of came out at the right time in terms of, again, lots of interest in immune profiling because of COVID, because of infectious disease research, the actual fraction of that -- of the sales of the product that's specifically related to COVID is actually -- it's not that large. It's minor, right? It's minority relative to the bulk. So the bulk of the demand, I think, is still going to be like -- while infectious disease is now definitely a bigger fraction of what we had expected before, what we're seeing before, the bulk is going to be in your sort of cancer, immuno-oncology applications and, yes, sort of -- I think this is where there's a lot of interest and order immunity and some of the basic biology applications as well.

Okay. Okay. Justin, we're 5 weeks into the fourth quarter. You kind of put overall order trends at 35% or so. Is there anything you can say about how that balances some of the things going into the quarter that are risks, obviously, COVID related? And then some of the upside items that were trending and working for you going into the quarter, which is to say, I mean, you could do a pretty rudimentary math equation on 4Q revenue from last quarter and arrive at another around $100 million. What kind of puts and takes does that leave you with when you're thinking about where the bogey may lie or may not lie?

Right. So I think as far as headwinds go, the rising case counts could bring about unanticipated shutdowns. That could be a headwind if the situation worsens. There could also be tailwinds around the seasonal impact that we typically see at the end of the quarter and even more magnified at the end of the year. If there is a higher-than-normal budget flush at the end of this quarter, that could be a definite tailwind. This is a pretty big impact last year in Q3 or Q4 of 2019. And so we would have to see a similar dynamic at the end of this year for that 35% year-over-year to hold.

Yes. Anything to be said about the weighting of consumables versus instruments in that order number?

This was in aggregate. Demand is strong for both instruments and consumables.

Okay. Okay. Maybe I'll just ask about Chromium and say, this is sort of a high-level, maybe difficult-to-answer question on a session like this. But one of the questions we get a lot is just what is the out-year trajectory for Chromium placements? You had 650 of these things placed last year. How, at a high level, can you think about the application base expanding? And how that translates to the long-term trajectory of Chromium? I mean could you step up significantly in the out years? Or is your base case kind of -- here is what we're doing annually and you think about it being about placements of these boxes and then utilization increasing on them? So basically, if you can give me the trajectory of placements over the next 3 years, that would be helpful.

Yes. I could start. The last update that we gave on the installed base was midyear, and that was 1,993 instruments. And so we've placed 327 in the first half of this year, we placed 645 last year. So if you just multiply that out and don't even account for the seasonality in the back half of the year, we would be on track to have more placements this year than last. One dynamic that we've seen is that our earlier customers continue to increase their usage and continue to increase their placements as well. And as we introduce more applications and we bring in more customers, I would expect that dynamic to continue.

Yes. Yes, maybe to that point and just sort of the scope of what your customers are doing. At the end of last year, you talked about a lot of labs running. And Serge, you were mentioning 10,000 cell experiments and that there were some that were running 100,000 cell experiments. And that there were some like burgeoning interest for 1 million cell experiments. How common is 100,000-cell experiment today? And do you see 1 million cell capabilities in the next year or so? I think at the time, you kind of said it was a 2-year vision. I'm curious as to where you see things in that respect.

Yes. I mean in terms of like product capabilities and where things will become feasible, we'll talk more about that next year, around sort of the larger numbers, 1 million or so experiments. As far as the kind of the demand, I do think that people have been scaling up, our customers, their experiments. Certainly, it's not sort of a very -- there's not a clear-cut line where people weren't doing a specific type of experiment before and now they are. It's just more like kind of as [indiscernible] life cycle to end up scaling their experiments and kind of envisioning larger and larger experiments. And you can sort of track that somewhat -- well, maybe a little bit episodically, but within -- using papers, publications that have been coming out using single cell. And you consistently now are seeing where people have run more than 100,000 cells, sometimes highs of tens of thousands of cells, which usually suggests the experiments themselves were larger than that because when you incorporate controls and other kind of other deal that they would have collected. So we definitely see that sort of progression through time that people keep kind of inching up in their demand in their scale. And our goal is to kind of lead in -- leaning into that those trends and help them kind of scale up.

Okay. Are there labs today that if you said, "Hey, we are supporting the million-cell experiment, they would be doing sufficient amounts of work of that scope? I guess I'm just trying to understand where is the bleeding edge right now?

Yes. I mean I think the bleeding edge is there, but there's not a huge number of labs like that. And part of the reason we started talking about those capabilities in advance of launching them is precisely to give people the time to plan out those kinds of experiments, the time to think about those kinds of applications because they certainly are there. The people who are at the forefront of the single-cell revolution or had been there, they're definitely -- their minds are in those higher numbers. That is what they're planning for.

Yes. Okay. Okay. Maybe just sort of touching on a particular application that came up when we were doing our work. There were actually several that I felt really interesting. Epigenetics was one of them. The comment was made by one of the guys that we talked to that had said in this single-cell world, it's still fairly niche, but there's obviously a ton of interest in epigenetics at the bulk analysis level. What do you think has to happen in order for that interest or that body of work to go to where it is in the bulk world?

Well, it's a really good question, and we are like kind of real-time getting an empirical answer to that. So one of our hypotheses was that the -- having a product that connects gene expression to epigenetics was going to be a big boost and a specific interest to the epigenetic community at large. We were expecting that to be more of a story kind of next year because we saw the immediate demand was going to be from our existing customers, but ahead of our expectations. There's been a fair amount of demand for that -- for the product that we just launched, the multiome gene expression-ATAC combined product from new customers outside of sort of the single-cell ecosystem. So I think that capability seems to be -- to have a really good chance of bringing that broader epigenetic immunity into the single-cell world. We're feeling pretty good. Early days, but feeling quite good about that now.

Yes. So the hard part with you guys sometimes is just trying to keep relative track of these complex new products and which ones are doing well, but off of a small base, et cetera. So it sounds like that would be one that would be hitting the mark in terms of early traction is good, and we should continue to monitor where that's going and how it's being used.

For sure. That one, yes, exactly. Again, it's here in the market with our existing customers. But I would say, also ahead of schedule, kind of drawing interest from the broader community as well.

Yes. Okay. So do you feel like there's a point -- and this is, I guess, a question for either of you guys, obviously, but is there a point where we should think about in the out years? Revenues from some of the more complex kits exceeding just [ simple-mode ] single-cell gene expression revenues? I mean, obviously, you're -- not obviously, but it feels like that's the bulk of revenue today is still single-cell gene expression, but you're trying to be a toolkit provider. And if some of these applications really take off, it seems like that could be at least close? Or am I way off on that?

I think it's the right kind of ballpark to think about. Certainly, other applications have been ramping up, whether it's immune profiling, which is now a pretty strong meaningful product relative to expression, the sort of the epigenetic, now the 2 products, the ATAC-seq and kind of the multiome products are also quite meaningful in the background and, of course, spatial gene expression as well. So I think it's the right way to think about it. One thing I would also emphasize is that gene expression, by itself, is no longer really, for the most part, most -- a lot of people who run it don't -- no longer run it as just gene expression. There's oftentimes combined with protein analysis or doing CRISPR screens, which kind of -- so there's additional features that come along with it. And then we do have people quite often running multiple applications, right? So even if gene expression is sort of the pool, it kind of -- it's done in the context of other experiments as well.

Yes. Okay. So Justin, if I sort of take that idea to the forecast into the model and say, all right, we're all trying to understand how consumables utilization grows, there are these applications that are contributing to just more work. And if I look back last year, the average pull-through was $160,000 or so, but you guys have said yourselves that you can find users that are buying $1 million worth of reagents. So when you think about the forecast going forward and how consumables growth might look, I guess is the answer is [ varying by both ], but do you think about it as being more related to existing customers working from $160,000 to something higher? Or just opening up the single-cell market and getting some of these folks that may not be at $160,000, but they're now in the picture very much in a way that they weren't a year or 2 ago?

Yes. I think it's going to be both. There's 2 dynamics working there: the first is the numerator, just overall consumable usage; and the second is the denominator, the overall instrument placements. And as we continue to place more and more instruments each year, and there's some type of ramp-up period for those new customers for them to get to the roughly $150,000 average annual pull-through. The fact that, that average annual pull-through has remained relatively consistent with modest increases, I think, is remarkable. And that's really being driven by our existing customers continuing to increase their usage, with some up to that $1 million annual pull-through that you mentioned.

Yes. Okay. Maybe just on pharma usage because it seems like that's certainly going to help, too. I mean when we were talking as we were trying to launch, it felt like you were -- I don't know if that was an inflection point, but it certainly was a point where you were starting to think more about how pharma was really going to get involved here. How are the trends there? Is the Chromium Connect demand what you thought it would be? And ultimately, I guess, if I'm again trying to do a modeling -- ask a modeling question, does the ASP for boxes start to work for me? I mean, I think some folks model Chromium Connect and Chromium separately. But if I just sort of think of a blended instrument ASP for single cell, should that start to tick higher just given where you're coming in there?