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

All right. Hi everybody. It's Doug Schenkel from the Cowen life science and diagnostic tools team. It's my pleasure to welcome 3 folks from 10x Genomics to the 41st Annual Cowen Company Health Care Conference. I don't know how everybody looks on everybody else's screens, but I know who the folks are. So I can't order them in position on your screen, but we're really happy to have Serge Saxonov, the company's Chief Executive Officer; Justin McAnear, the company's Chief Financial Officer; and Brad Crutchfield, the company's Chief Commercial Officer. Gentlemen, thanks for taking the time and joining us today.

Thanks for having us, Doug.

So I think most people on the line know 10x at a high level. I think it's fair to say 10x Genomics has developed an extremely strong reputation as both a partner and an innovator in life science tools. We continue to believe 10x is well positioned for growth via existing and new product launches in single cell and spatial omics. And over time, we expect you to move into other adjacencies. So in terms of just road map for today, we're going to spend the next 25 to 30 minutes talking about the outlook for 2021, talking about progress with the base business and then get into kind of the new products and pipelines, just pipeline discussion. Before we do that, I want to start with some high-level kind of positioning and strategic thinking questions. And I've asked this question of you before, Serge, but I think it's -- I still think it's a good one. I think for those of us who've done work on the investment side, trying to get smarter on single cell over the last decade, even when 10x was a 5-person company, I know I would, and I know others would go out and do channel checks on other companies and 10x would come up even as kind of a very small up and comer without a product yet. And what we would hear in those discussions with KOLs and lab directors was that folks are really excited about 10x. And they kind of view you not as somebody that was trying to get money out of them, but as really a partner, that was really working hard to come up with advancements that could allow them to do novel things in the lab. I mean it's interesting. Now you're a pretty big company. You're growing a lot. And we still hear the same things in our checks. And I'm just wondering how you go about maintaining that and how important that is moving forward? Obviously, you want to keep that going. But practically speaking, it would seem to be hard as you get bigger. So how are you thinking about that? And what steps are you taking to basically maintain your position really as a partner, more than just a pure vendor?

Yes. So I would say, first of all, look, this notion of seeing our customers as partners and obsessing over their success is that -- is absolutely essential for us. Like -- so the part -- first part of your question, whether this is important, yes. It is central. And that's how we see that as a core part of our competitive advantage and our -- the foundation for our success in the future. I think a lot of it comes down to having a long-term focus because what happens is usually when the company -- companies first appear as small, they know that it's very important for them to establish their brand. And they tend to be very nice to their customers. But then once they establish their market then the -- a position of some prominence in their space, they oftentimes kind of start neglecting their customers. And I absolutely want to make sure that, that doesn't happen to us, and we've been investing very intentionally to make sure that doesn't happen to us. And that's driven -- I mean it's very rational for us because, again, our focus is long term. Yes, we are successful so far, but this is still early days. We're just getting started in many ways in our markets as we look to the future. And so there's many -- we expect that we're going to keep interacting with our customers for many years and many, hopefully, decades to come. And so we're going to keep investing in customer success. So a lot of it has to do with having the right people, especially in our commercial organizations, who come with the right mindset. It's not in terms of squeezing the customer, but really, again, obsessing or making the customer successful. We keep investing, invested very intentionally from the beginning into our customer support organization, and we're going to keep doing that, onboarding customers and following their success. And then it also goes from the top in terms of like we all love seeing what our customers do with our products. And more importantly, we also love hearing what they are not able to do and what they would love to do, right? And that's been a virtuous cycle. It's like -- I mean it really energizes everyone in the company when we hear something our customers ask for it. We spend -- invest a lot of energy and resources in building it, and then we'll come out with the products and the customers are excited and overjoyed to see it come out and see the light of day and see the use. So that's a core part of our culture, and we intend to keep focused on that.

Yes. As you're describing that, Serge, I remember when you and I were first getting to know each other. And at some point in our conversations, we inevitably get talking about when I was here in -- when we were doing our channel checks. And then I remember you uniquely almost always very quickly moving to like, hey, what don't they like, tell me what don't they like? I want to know. So it's good memories, but I know you're still focused on a lot of the same things. And inherently, I think you guys realize it's important to not get too seduced by your own perfume, which I think is a unique attribute to 10x relative to others. With that in mind, you guys have uniquely, at least in my view, done a great job of kind of balancing build versus buy appropriately and recognizing that you have really good technology, but also recognizing sometimes there's going to be things that are developed outside of 10x that either can be advanced more quickly under your umbrella or can you uniquely complement what you're already doing. What's the framework you're using as we sit here today to make a decision on build versus buy?

Yes. So I mean, first of all, we don't have like hard and fast rules in terms of some 30% of our growth has to come from this bucket or that bucket. I think both organic development and our investment and inorganic is part of the same overarching strategy. We kind of -- we spent a great deal of time thinking about where the world is going. And that comes from internal kind of first principles conviction, but also talking to our customers. And the advantage that we have, we have a lot of customers that are kind of forward-thinking and are at the frontiers of biology. And now we work backwards from, like, okay, so what would we need to build to satisfy that future, to bring the future forward, and we start making internal investments. And usually, the internal investments also inform our outside strategy because as we get smarter internally, we also get smarter as we are able to evaluate what everyone else in the world is doing. And like humility, I think, is a part -- like a core part of our internal culture. We like to have super smart people who are really driven to do great things, but at the same time, make sure recognize that we don't have a monopoly on smart people, and there's all kinds of innovation that happens outside of our walls. And so we try to be very diligent and kind of focus on what the customers will need in the future and scouting the world for making sure there's someone -- if someone had done something great to satisfy those needs, we then go out and acquire. I think one of the things -- kind of one of the ways in which we've been fortunate in that by virtue of having a really great product development organization that can go kind of from 0 to a complete product and having a great commercial organization that keeps a pulse on our customers really closely, we can gain conviction pretty early in terms of, again, where the world is going and what kind of technology would be necessary. And that's been helpful to us in terms of making acquisitions and making moves. And then also, we can take very early technologies and products that are not -- that have something great about them, but very, very far short of complete products and turn them into really great kind of market-setting products. And I think at this point, too, what is interesting for us, I think from the perspective of organic innovation is, while we still have a high velocity of internal innovation, we also have the scale. And so that gives us now somewhat unique opportunity to pursue the kinds of projects that would be harder for other companies, either because they're too small or because they don't have the same velocity of innovation. And so we intend to keep investing and kind of spreading our size that way.

Yes, that's a good segue to my question about -- my next question, which is really on kind of evolving competitive dynamics. In a lot of the areas in which you play, when we think about who you're competing with, historically, there's kind of been 1 or 2 other folks that we focused on. All of a sudden in the current environment, I think in part because of the success you've had, it's -- there's been a lot of investment in emerging technologies. I mean it almost feels like there's a spawning of new spatial omics and imaging companies. I feel like we're coming across one, if not every week, every day. I mean how do you think about that? I mean does it make you a little more nervous about the competitive landscape? Or do you view it as almost validating of your vision that there's real demand for these technologies? Or is a little bit of both?

Yes. So I personally tend to not subscribe too much to sort of the validation notion, like the market is either there or it's not. We gain conviction about those things. We've tried to do it ourselves, to our customers and again, our internal thinking. And we do take competition very seriously. And you're totally right. I mean it's like there's a lot of companies. And the fact is you see that we certainly have seen that in spatial and in single cell over the years. But yes, in situ now, there's a lot of new companies. And from the beginning, and we always take competition very, very seriously, like -- and that's -- and the way we have addressed it and the way we plan to address it is by focusing on innovation and on amazing customer experience. So that is kind of our -- that's our view. Like we take -- it's not surprising, I would say, especially, like you said, given our -- given our success and given sort of the markets here are really big. And so our answer to that is that, yes, I kind of invest in what we've been doing, which is innovation and the customers. And the fact is as a bigger company now, too, we can do more things in both of those fronts.

Yes, it's interesting, going back to your -- so the last thing we talked about, I mean, with the scale, the breadth you have, the ability to invest in R&D and really target many different initiatives. It puts you in a unique position where you can essentially maintain leadership positions in the areas in which you play. I don't want to call that defensive, but that's just part of the core. But then you're probably better able to play offense than some of these other companies where you're able to -- I'll stop with the metaphor, but you're able to keep more programs going, whereas other folks got to just focus on one?

Yes. I mean for sure, it comes with its own downsides as well, right? Like we have to manage internal focus and make sure that we are also appropriate...

Yes. Yes.

Sort of leadership benefit to manage that.

All right. Let's talk a little bit about Chromium specifically. So you ended -- I'm going to do this on the fly, so I don't mess it up. And I know if I do mess it up, you guys will help me out. But I think you closed 2020 with about 2,400 instruments out there in the field. You placed about 750 instruments, with some error bars around that last year. Instrument placements, it's not apparent to us, but that's an area where you guys have meaningfully got hit due to COVID over the last few quarters. Obviously, we're coming out of that right now. I'm sure there was some impact, but the reason I frame it this way is, right now, we are modeling 830 placements. I think you've guided to over 800 placements for 2021. Is the thinking there that, obviously, that's a lot of boxes, there's a lot of interest in the space? But also sort of an acknowledgment that there's not a ton of catch-up that has to occur subsequent to the pandemic?

Yes. So I can take that, Doug. And I think when you look back at 2020 as far as the impact of COVID, you're right that instrument placements weren't impacted nearly as much as consumables were with some of the labs being shut down and the reduced capacity overall. There was some benefit to instrument placements with customers that were doing COVID research. We took a deeper discount on that than we normally did to get those customers up and running. And we also had customers that had the need to place instruments in biosafety level 2 and 3 labs. And once instrument goes in a lab like that is difficult to get out, so they needed to buy another instrument. And so we placed 746 instruments this past year. That's an increase from 645 the year before and 530 the year before that. So we've been steadily placing more and more instruments each year. That still holds true for this year. Whereas we didn't give specific guidance around instrument placements, something in the 800s wouldn't be unreasonable. It's something that we focus on. It's a leading indicator of overall revenue growth. And if we think that this is an instrument that should be on every biology lab bench, we've got a huge opportunity in front of us, and we're under-penetrated right now.

Over the next few years, and I totally get it if you don't want to answer this, but I mean the way we're thinking about things for 10x, at least as it relates to Chromium specifically, as that installed base is going to continue to grow and you have a decent chance over the next 3 to 5 years to continue growing Chromium instrument revenue in the double digits. But over time, as the installed base grows and you expand the menu of what you can do on these instruments, consumable revenues should far outgrow instrument revenue growth. Is that a fair way of thinking about it?

Yes. When you look at the overall consumable revenue, the percentage growth on the dollars, that is going to be the key source of our growth. And the instrument -- the growth in the instrument installed base is going to help continue to enable that.

Brad, are you seeing any difference in behavior between academic and biopharma, whether it comes to how much they're using the instruments, how much of an appetite there is to invest in capital coming out of the pandemic? And I guess, maybe as a background question, there's this concept of halo users, is that more of an academic dynamic? Or is that biopharma as well?

Well, I think in some aspects, Doug, it's -- they're very similar in the sense because if the majority of our pharma revenue comes from the discovery side of the house, and they operate somewhat similar. Maybe less so halo users' issues there if pharma wants something they can -- generally, our instrument isn't a big purchase decision. So I'm not seeing a lot there. As we come out of the pandemic, again, a lot of the pharma companies were gearing a lot of their research around vaccines. Of course, that changes a little bit of the dynamics. But in general, I think early on, big pharma was equally limited by COVID because they -- and biotech much less so. Now I think all of our customers are kind of reached asymptotically, what is their new operational capacity. And it will take 3, 4, 5 months into the current vaccination process to, I think, change that dynamic sufficiently. But I think in general, it's getting close to so-called normal.

Normal. Okay. And in both end markets?

Yes.

Okay. Targeted gene expression products and simultaneous ATAC and gene expression products, seemingly have been pretty well received by customers so far. Is that also balanced, Brad? Or is that a little more biopharma? We can see where those applications might have particular interest to biopharma discovery folks.

Yes. I think initially, though, very much geared towards the discovery profile, whether it's in pharma and academic around the multiome product. That's really a product that a lot of people have been waiting for because, obviously, to simultaneously measure -- do dual measurements. But the other -- the targeting product is sort of ahead of its time because it's ultimately when the world shifts away from unbiased, I just want to know what I can know versus I want to ask specific questions. And I think we've said before, the asking specific questions is a key part of pharma adopting is in the validation portfolio or their validation pipeline because, obviously, at that point, you can't unknow something. And that's an environment where there's a lot of other people that look at what you're doing. So that's -- we've really set that product up so that it gives people the promise they know from that unbiased, they can make that transition.

Super helpful. Chromium Connect, and for folks who don't know what Chromium Connect is, this is a system that facilitates workflow automation at a higher volume to ultimately results in basically improved productivity. And also, we think, better reproducibility across labs. It's been out there for a couple of quarters. Serge, how do you think about Chromium Connect in terms of being maybe a replacement or additional instrument for existing customers versus opening up new accounts?

Yes. I think it's less about opening up new accounts because it's, for the most part, people who have gotten comfortable with Chromium and due to streamline the workflow, right, workflow automation. That's what it's about. And now kind of generally expect to run more samples through them. They're sort of on a higher usage side. And so the kind of our initial target use case is pharma companies, and that has been borne out in terms of the early interest, but also that some of the core labs, especially in a COVID environment where you kind of want to minimize the number of people that are coming in and interacting with things physically, it becomes compelling. The downside, of course, is that it is a more complex instrument that requires actual like installation on site, which has been more challenging, specifically this past year, right, to do. So pretty early days there. But so far, the sort of our fundamental thesis with the instrument has been consistent with the reaction in the field.

And to your point, it's still early days. But ultimately, we should expect, for all the reasons we just talked about, the Chromium Connect has a decently higher consumable revenue pull-through per year than core Chromium. It's just hard to tell what that's going to be as we sit here today. Is that fair?

Yes.

That's fair. It's -- we've modeled it internally to be considerably higher than the Chromium, but it's still early days, and these have been installed in the time of COVID. So time will tell.

Chromium X. So you're planning to launch Chromium X, which will, I think, allow folks to analyze up to 1 million cells per run. I think that's a second half launch last we wrote down. Is that right? And then I think the list price is around $100,000, just by way of background. What percentage of your current and new customers would be interested in this product? And then ultimately, for this type of -- for this number of cells, do you need Chromium Connect like automation for this to really appeal to the masses?

So this instrument, its capability we expect to go out -- will be most naturally received by our core, most sophisticated customers. That's where there's going to be the focus there. The ones we've been pushing the cell numbers historically, right, to 10,000, 100,000 now to 1 million. That's where the demand is. In terms of whether we need -- and there's some really nice exciting applications. In terms of where -- whether we need additional automation on top of it, probably not or at least not, we'll see. It's an interesting idea. I don't think it is a necessity by any stretch. These same customers have been fine working with our standard Chromium for like a good number of years now, and they figure out sort of the workflows. They tend to have people also to do that. So we'll see. But I think at this stage, I don't think the workflow is going to be a limiting issue.

Serge, I have a proteomics question, which I decided to layer into the Chromium section. I mean there's probably a higher-level way to ask this. But as we think about Chromium, and we think about a droplet-based technology, I think one of the things we've struggled with, and this is why we're not working at R&D in 10x, is trying to figure out if single-cell intracellular protein, its accretive protein profiling would be possible with droplet technologies. Is there a path?

Yes. The answer is yes for both of those. For intracellular, there's actually been some public data, and I think some of it we showed that just shows proof of principle and that is possible with the right kind of fixation approaches. So that certainly is there, and that's relatively near term in terms of people implementing it. Intercellular signaling is also possible. There's ways, again, we have pretty clever R&D folks who have been thinking about this. So it's definitely possible. It's not quite as -- I'm not sure if there's sort of public data around that, but there's definite ideas that can make it work.

Okay. All right. That's great. Interesting. So we'll wait to hear more. Maybe just to ask a couple of Visium questions. And unfortunately, AGBT overlaps with the Cowen conference this year so we haven't been able to pay as much attention to any new product announcements or data presentations. As it relates to Visium, anything exciting that should be highlighted, I guess, either between AGBT or the events you hosted last week?

So with Visium, we are really kind of in this position of establishing it as, I think, as the leading product, especially in translational discovery. We have FFPE compatibility. That product is awesome and is getting really great reception from customers. That's coming soon in the first half of this quarter.

Not second quarter?

In the second quarter, that's right.

Okay. Okay. Sorry to interrupt.

Yes, yes, yes. So that's coming. And then next year, we talked about Visium HD, which is the single-cell resolution Visium, and set of system instrument for -- to gain access to all the archived samples that are out there. So I think all of these together will really kind of bring -- put additional accelerants into the Visium platform, which we're really excited by and definitely...

And there will be capabilities at some point for protein on Visium as well?

Yes, that's right. So second half of this year, like where we're bringing a feature barcoding compatibility. You can already do immunofluorescence, so this is the basic level where you have 1 or 2 -- a couple of antibodies together with the gene expression, but really to bring high -- super high plex levels, we'll do that towards the second half of the year.

You've been doing okay on the translational side, but as you move into -- as you launch FFPE and as you make advancements in protein, does that kind of -- do you think that turbocharges, sort of the demand environment for -- amongst translational folks?

Yes, absolutely. I mean it's almost finding that we've had as much traction as we have had without having FFPE compatibility because it's almost like a requirement for that customer segment.

At the beginning of the year, and again, I apologize if I missed anything new this week. But at the beginning of the year, you announced the launch of Visium HD, and you indicated that's going to have a resolution of 1,500x the original Visium product. How important is that in the context of just thinking about your competitive positioning?

Yes. So just a little bit -- a slight modification to that. It's 1,500x the original transcriptomic technology. It's 400x the resolution of the current Visium. So it really takes the Visium platform to that ultimate resolution, the single-cell resolution. Having said that, the current standard Visium is actually very high resolution. Highest resolution of its kind in the market does 55-micron spots, that's like 1 to maybe a dozen cells at a time and very large scale, very comprehensive. So it is a great product to think about. HD really takes it to sort of its ultimate what was meant to be. It's a new kind of underlying technology and definitely excited by that for next year.

Maybe just to quickly close with one question on the in situ product initiative. We are starting to see some data on specs from competitive products. When do you think you're going to be in a position to share a little bit more so we can at least initially start to think about what the strengths are for the 10x approach, where you need to get better and how that compares to some of the other products, which are advancing towards the market?

Yes. We're not at the stage where we are ready to talk about specific specs. I do want to emphasize that the capabilities that we brought, especially through our acquisitions, give us the opportunity to build out many different products and features. And so it's not going to be -- we shouldn't be thinking about this as a single product that's going to be coming out. It's a platform on top of which we will build a series of products that will be optimized for the right applications for customers and kind of taking different trade-offs into account. So not ready to talk about that yet. When we are in the future, we'll give more review.

Okay. Makes sense. Gentlemen, Serge, Brad, Justin, as always, really appreciate you taking the time.

Thank you, Doug.

Thank you, Doug.