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

Well, we have 10x here and happy to be hosting 10x on our second panel and go ahead and get started. Today, from 10x, we have Serge Saxonov, CEO; and Justin McAnear, the CFO. Welcome. And just a reminder, if you would like to ask a question in the audience, we have instructions on the screen there, and there are also instructions on the tables.

So maybe just to get started here, maybe focusing a little on the 2Q results. You had pretty strong placements in the quarter following your pricing adjustment on the Chromium Controller. Can you talk a little bit about the strategy and the increase in instrument placements in the quarter?

Sure. So this is Justin McAnear, CFO. We lowered the price of the Chromium Controller to $35,000 in advance of the launch of Chromium X to make sure that we had the product positioned appropriately in our new lineup of instruments. And as we noted on our Q2 call, that drove about 100 incremental placements above what we expected we would have done this quarter. So demand for instruments is strong, especially at this price point, and it could drive a pretty large increase in the installed base this year. But keep in mind, the $35,000 was a promotion that we ran during Q2, and we made that permanent at the beginning of Q3 once we announced the Chromium X. And so we started this in Q2 because we didn't want customers to be unhappy if they just bought a Chromium at $50,000 or $55,000 right before that announcement. So some demand could be driven by the urgency of having a promotion that was expiring at the end of the quarter. And some of that could be pulled forward as well. And so what this means as far as demand at the $35,000 price point on a long-term basis, we'll have to measure that over time. But we're definitely pleased with the results for Q2.

Thanks, Justin. I guess, can you also talk about consumables revenues in the quarter? Are you seeing any trends on new customers that you had as part of the larger number of instrument placement in the recent quarters?

Sure. So consumables revenue increased over $4 million quarter-to-quarter. We saw really strong growth in AMR and EMEA. We did see a decline in APAC due to seasonality. So Q1 is typically bigger than Q2. And as APAC becomes a bigger part of our revenue overall, you're going to see more of that impact in the Q1 to Q2 compare. So during the pandemic, we've onboarded thousands of new customers. We are finding that some of these new customers are taking a little bit longer to ramp up than customers that existed before the pandemic. And so we think that some of this has been exacerbated by COVID restrictions, not having the 10x support staff on site to help some of these customers ramp up. And some of this is due to just the lack of resources that some of these new cohorts of customers have, maybe lack of a core lab or lack of other groups on site that have gone through a 10x onboarding previously.

And maybe adding on to that, can you talk a little bit more on the lab trends that you've seen over the last month and how things have changed with the Delta variant? And what is your expectation on access to labs in the second half of the year and then into 2022?

And so first off, access to the customer labs, in particular, new customers, is very important to our business and helping the customers ramp. And so for most of Q2, we didn't have access to many of our customer labs and that started to improve in June. And by the end of Q2, we saw a lot of our customers had returned to semi-normal operations. But in the last few weeks, we have seen some customers instituting restrictions to offsite visitors and 10x support staff not being able to come on site. And so that is a concern as far as the ramp goes for those new customers. And we've considered that and some of the risk that, that brings about in the guidance that we updated -- or in the guidance that we reaffirmed for the latter part of this year.

Got it. I guess just maybe even digging a little bit more on the guidance there and your philosophy. Can you maybe talk a little bit more on the puts and takes and the impact on there on the new customers, the new placements and COVID and just on your guidance for the second half of the year?

Sure. Maybe just start by talking about our overall guidance philosophy. We don't prioritize quarterly results. We're executing on a longer-term plan. But as part of our guidance philosophy, we give annual revenue guidance. We continually assess that outlook and incorporate new information as we receive it. In this case, it was -- the rising case counts was probably the issue that was most at hand when we considered if we would update our guidance or maintain it. Really, what we try to do is present a balance between the risks and the opportunities as we see them and give our best view at this time.

Thanks. Maybe for Serge or Justin, you've talked about a $15 billion TAM with academic and pharma markets with upside up to $60 billion. One way we try to assess the opportunity, single cell opportunities by considering for a typical target customer, what percentage of their experiments deploy single-cell analysis today versus the future. And can you maybe give us some insight on your approach to how you've calculated your TAM for these markets?

Yes. So maybe I'll take this one. So it is like just kind of, as a preface, one of the challenges with our market, fundamentally assessing markets is that there's not like a great predicate in terms of we're like replacing a particular technology that came before us or going after a very specific application or a target cell like you might have with a medical device or diagnostic platform. This is -- a single cell approach is spatial as well we're largely creating new markets, new opportunities to drawing kind of customers and dollars from all across life science, tools, research. And so that's -- it's a challenge to quantify kind of by definition. You're creating new things that didn't exist before. We're not displacing any one specific thing, but rather many different things. And so this is where we come at -- and you can look at it, kind of triangulate on this 2 different perspectives. You mentioned there's the sort of $60 billion overall spend that's out there for research tools globally. And if you zero in on it -- certainly our ambition with our products ultimately is to kind of change the way that research is done. And we do believe fundamentally that much of biological analysis should really be done with single cell resolution where appropriate with spatial context. Now kind of zeroing from there and kind of looking at just those -- the spend on those technologies that are already kind of doing things at high resolution, large scale, that's where you get to about $15 billion in total spend. So this is like [indiscernible] sequencing, microarrays, flow cytometry, some elements of protein analysis, things like that. Now you can also look at it from the perspective of just kind of what is the total number of laboratories that are out there, maybe just getting more sort of -- one of the questions you put in there. And you can look at -- there's about 90,000 NIH labs. So labs will get NIH funding other -- in the U.S., plus on top of it, there's probably another 10% or so on top of that, that there are sort of directly government governmental labs. And then you sort of -- you can roughly double that number globally. And then on top of that, there is also a sort of nonacademic biopharma world as well. But just focusing on sort of an academic research market and the number of labs, you have like well over 100,000 easily over there. And then within those, if you look at what kind of research they're doing, what questions those labs are asking, about 2/3 of those are asking questions where a single cell analysis right now would be directly useful for answering those questions. And then within that subset, you look like a very large fraction, looking from 1/3 to 1/2 are people who are using kind of technologies that are particularly amenable to getting displaced by us. And so like when you triangulate those kinds of like -- kind of add up those numbers and you get close to that sort of $10 billion to $15 billion number as well. And then as far as the distribution of spend within those labs, I mean that's -- so that really varies greatly. Certainly, some of the early adopters tend to spend a lot. And they are -- we have labs that were a large fraction of their budget goes to 10x, although still with plenty of room to grow. And then there's lots of labs out there that are just kind of starting to use single cell analysis at very early stages with our adoption. But kind of regardless of how you look at it, we're still very, very early on. When you look at, again, like well over 100,000 labs as being a total potential opportunity out there, we've only sort of entered into a few thousand. We've got over 2,400 instruments out there. But the total opportunity is much greater than what we have covered so far.

And 10x has done a pretty good job of expanding this customer base. I guess, for the new or potentially new customers that don't conduct single cell or do a small amount of single cell research today. What factors do you think are holding them back from conducting more single cell research?

Yes. So for people who are not yet in the ecosystem, there's sort of an organic path to market growth. And if you imagine just general awareness, it's kind of interesting. Because when you look at some areas, of course, we're a well-known in single cell analysis, it's kind of the thing that everyone talks about. But so much of biology is beyond that and we're -- it's all kind of questions that are being asked, where people aren't really that aware, especially people -- biologists who are not that technology oriented are not yet aware of single cell approaches. And so part of what has to happen there is just general awareness as sort of increase. And also kind of some amount of social proof. And this is where publications and papers are very natural kind of catalyze stimulators of demand. And then also grant cycles, right? Even if -- once people kind of have an idea they want to use 10x or use single cell, there's still some amount of time before -- for them to submit their ideas in the ground and get the funding in order to actually get going with it. So that's sort of an organic thing. If we did nothing with our product development at all, our market will just naturally grow because of those factors or those dynamics. But of course, we're keenly aware of like what are the actual sort of limitations where there's a bunch of throttlers that despite our like rapid adoption in the marketplace, there's throttlers out there that would help us [indiscernible] them for -- to keep driving more adoption. And roughly 3 buckets, I would say. There's sort of affordability and then price per experiment for people. Some of it is -- we hear from our existing customers where they've got studies with many dozens of samples, let's say. But with single cell pricing, whereas right now, they spend -- they can choose a few samples around in single cell and the rest of kind of other techniques. And we certainly want them to kind of convert to run all of their studies -- the entirety of the studies on 10x and single cell. There's also -- other buckets are around sample prep, so kind of like actually getting your cells dissociated and prepared for it to go into 10x systems and then analysis, biokinetics or downstream analysis. And the thing is like all of these considerations are much less of an issue for -- tend to be much less than issue for kind of early adopters or technology customers or kind of more sophisticated labs like The Broad that have plenty of their molecular biology capabilities, they've got plenty of software, the best computation biologists in the world. You give them a tool, and they can figure out the whole ecosystem around it. But as we reach further and further into sort of that 100,000 lab universe, those customers have more limited resources when it comes to the game of technology components. And there, we -- our goal is to invest in bringing kind of -- removing those throttlers and helping them along. And so there's investments we're making sample prep, and a lot of them are -- have to do with just on this customer support side and helping spread just the knowledge around how to prepare samples for some of the most sophisticated customers to less sophisticated customers. We're also making investments on the informatics side, especially with the kind of the recent announcements we made around 10x Cloud to make analysis as easy as possible for new customers. And then also kind of the middle part of this equation in terms of affordability, especially for people who are gearing up to do more experiments or they're looking to do new kinds of studies, so we released a new kit what we call low throughput kit where the price per sample is considerably lower than our flagship product. The performance is not quite -- kind of the specs aren't the same as our flagship, but it allows people to try small pilots, to tweak things, to treat conditions before they launch into larger experimental campaigns. And then the CellPlex kit, which we also released earlier this year, allows you -- allows our customers to pull multiple samples together into a single 10x channel which effectively reduces the price per sample pretty dramatically, you get even a lot of samples to run. And that's another throttler that starts addressing people's hesitation around entering the 10x single cell ecosystem where now the potential for running large experiments at an affordable cost per sample becomes -- opens up to a lot of these new people. And so that's kind of our vision overall. We're pushing on an organic path to keep kind of expanding the market, but also keep working on removing the different bottlenecks along the way that can potentially throttle adoption, especially as we get into these larger and larger cohorts of less technology -- technologically oriented customers.

I guess maybe a stepping back up another level. Where do you see the bigger opportunity long term within academic or research -- I'm sorry, academic research or biopharma customers?

Yes. So I think -- I would say a couple of things. First, from the beginning, we kind of grew up -- our focus has been -- we grew up in the academic research market. And that tends to be like the most natural place for new technologies to emerge because almost by definition, academic scientists are looking for new things. They're looking for new technologies that could give them an edge, kind of allow them to discover new things. And so academic research is a great market for like for entering new technologies and for kind of establishing new markets. I think it oftentimes tends to be underrated oftentimes because it's a little harder to quantify, again, because it's sort of -- it's based around novelty. And by definition, kind of novel new applications, new markets are hard to quantify. And so I think companies oftentimes underrate what can be done in the research market and oftentimes ahead of -- ahead of where they should be start focusing on downstream like clinical markets. We do -- we think we have a huge potential in the research market. Again, we've grown up there, but there's still way, way, way more room to grow there, and especially just by virtue of the fundamental kind of nature of the technologies that we're bringing to bear. Having said that, we do see a huge opportunity in biopharma. So far, we've entered -- we've had about -- the split for us has been about 20%, 25% pharma versus academic research. And both have grown at roughly similar pace. Although on the pharma side, we've seen sort of the progression where initially, our sales have been very much to sort of the tech development groups back in the early days and now have expanded beyond that into more of a discovery kind of phase where you're looking for targets. I'm kind of understanding some of the basic science and this, in some sense, follows very closely what happens in the academic realm and it's the part of the biopharma world that's more similar to academia. But then we're also seeing kind of expansion over the last year or 2 expansion beyond sort of the initial discovery into more like a drug sort of discovery lead, maybe lead optimization and preclinical studies, and even some clinical studies where you're starting to look at kind of secondary correlative endpoints. But that's very, very early on. The pharma customers do have like other types of requirements relative to academics, especially having to do a sample prep and things of that nature. But as we think to -- back to your question about the long term, in the long run, we see the size of the biopharma opportunity to be roughly of similar magnitude as the academic opportunity and certainly. So by that measure, we have a lot of growth ahead of us in that area.

I guess turning to Chromium. Can you talk about how you expanded the Chromium instrument suite? And what are you seeing since the launch of the Chromium X?

Yes. So a Chromium platform, we first -- we launched back Chromium Controller instrument back in 2016. Now it's been on the market for 5 years. And really, it's the instrument that catalyzed, in many ways, the single-cell revolution, right, over the last several years, drove huge numbers of discoveries and placed in thousands of labs. A little while ago, about 1.5 years ago, just at the start of sort of the pandemic, I guess, we launched our Chromium Connect instrument, which is -- which introduces walkaway automation. That is mainly aimed at biopharma customers as well as some amount of like core labs, customers that, again, value sort of hands-free time. And that has been our fleet for the last 1.5 years. And now just this quarter, and Justin kind of talked about this in his first answer, we launched our Chromium X instrument, which is meant to deliver higher throughput experiments, more cells at lower cost per cell and really aimed at our most kind of cutting-edge customers, the people who want to push the boundaries of single cell experimentation. We priced at sort of the higher, I guess, not exactly the top of the line because Chromium Connect is priced higher, but this one is within sort of the bulk of our instrument fleet, it's going to be the high price instrument at $95,000. And then we've also -- we have a mid-tier instrument that they were calling Chromium IX, that's meant to be similar to Chromium X, but lagging in the high throughput features but upgradable to it. And then Chromium Controller is now fitting in the low end at $35,000. So that's kind of the lineup that we're going forward with now. And Chromium X, again, we've only started talking to our customers just the last few weeks about the specific specs and then about this whole new lineup and what they're -- what kind of -- what are the specific sort of requirements around running these experiments. It's been a great response so far and very much along the lines of what we expected, where some of our like early adopters, people that are again are pushing sort of single cell analysis are definitely responding and that's resonating well with them. There's also kind of interesting. There are some new customers, I mentioned that on the call last week, that are interested that would have otherwise maybe purchased the Chromium -- the standard Chromium Controller, but now that they see potentially higher kind of the new generation of instrumentation coming at the board, they're looking at the X as the instrument to buy. But I would just caution that at this stage it's very early. We just started talking to our customers. We've only been -- we've only started educating our sales force around it. And launching any new product we found in this environment, kind of the pandemic around is also a little bit tricky. And certainly, will take some amount of focus from our sales force this quarter to get it to the market.

And on those new customers to 10x that you mentioned, any way to frame on what percentage of the instruments that you saw in place maybe across the different Chromium levels were new to 10x customers?

So we've -- especially lately, I mean, looking back to last quarter, we haven't talked about the X and it's -- I mean, we just launched it. But last quarter, especially when we talk about the new instruments that were driven by the promotion and the price change, something like 2/3 of them were new customers completely new to 10x. So a pretty substantial fraction of those. And that has been the pattern that we've been seeing for like -- since the start of 2020, I would say, when we kind of put some efforts specifically around our marketing and market development to start driving more new customers to the ecosystem.

And then I guess one last one here on Chromium. On the pull-through, your guide assumes $150,000 per customer in 2021. Can you talk about what factors are influencing this pull-through metric?

Sure. So there's multiple factors that influence the pull through. Keep in mind that it's an annual metric, we report it on an annual basis. And that takes into account the fluctuations that happened from quarter-to-quarter, including the impact of seasonality in Q4. So some of the basic factors that would influence through our pull-through metric are just the number of placements and how quickly we ramp the number of placements quarter-over-quarter. And then on the other side, you have the increase in the rate of just overall consumable spending. And that's influenced by our existing customers and the rate that they continue to increase their usage and also the ramp of new customers as well. And so really both placements and consumables revenue impact this. When you look back at this past quarter, consumables revenue grew $4 million quarter-over-quarter with the strong cadence of instrument placements. And so like Serge mentioned, a lot of these customers are new to 10x. And we're closely watching their ramps and doing what we can to maintain their ramp rate as they continue to adopt the platform. But as we expand into these new customer bases, as we introduce more diverse products, as we introduce new instruments such as the Chromium Connect, the X and the IX, even CytAssist coming out next year, just focusing solely on this one metric might not be as reliable an indicator of our performance. But for now, in the near term, $150,000, like we said before, is a good number to use for modeling purposes. And as the business becomes more complex, we'll begin to look to direct investors and analysts to the metrics that we think matter and perhaps share more information as well into the different product platforms and more regional color as well. For example, in this past Q2, if you look at the overall consumables line, like I mentioned before, AMR and EMEA had really strong growth rates. EMEA, over 50%, AMR over 25%. But if you look at the top line, there definitely was some impact there with the quarter-over-quarter decline in APAC.

Switching to Visium. Can you talk a little bit on the progress that you've seen there and specifically how the recent launch of FFPE has gone?