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

Thank you for joining us today 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. I'm delighted to have 10x join us today and representing the company, we have Serge Saxonov, CEO; and Justin McAnear, CFO. Welcome guys. Before I get started, just have a quick safe harbor to read here. Important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales rep.

So with that Serge, I mean, it's been a busy year for 10x. So maybe just to set the stage, can you give us a brief overview of what you think are the company's sort of greatest accomplishments here to date? And how do you view sort of the key strategic priorities for the company heading into 2022?

Great. Thanks, Tejas. Great to be here to kind of give a little bit of a snapshot overview like. So now this year, 2021 is certainly much better than last year. 2020 is nothing like it. But it has had its own sort of set of twists and turns along the way. And I would say I have to say that I'm very proud of the team for having kind of persevered, having navigated them quite well. The 2 biggest things we had to do, at least on the product side, this past year has been the launch of our vision for FFPE solution earlier in the year, which came on schedule in May and then Chromium X on the single-cell side, which we're in the process of launching this quarter, which has also been going really well and proud of the team for executing, all parts of the team, on that front. So -- and then as we look toward next year, we outlined a fairly ambitious road map early this year to what's coming next, and we're on track to be executing. So 2022 should be a pretty exciting year for us on multiple fronts. There's products coming on the Chromium side. There's going to be substantial products coming on the Visium side, especially Visium HD is something that's very exciting to us and our customers and a lot of interest coming through. And yes, we'll keep executing both sort of the near-term commercial plans and also the long-term vision, all the investments we're making in R&D across our 3 platforms are proceeding at pace.

Got it. Let's start on the Chromium side of things. Serge, I mean, it's a market which even though it's only sort of 2.5 years old, it feels sort of ancient when the focus is on spatial. But remind us again like how much runway you see there for future penetration here? And to what extent do you think is the cost of sequencing an issue in terms of democratizing adoption?

Yes. So the Chromium and the whole single all markets really kind of got an acceleration going, I would say, back in 2016 with the launch of the Chromium platform. And yes, it feels like old days now with lots of buzz around spatial ability. Single cell is very, very early, in its adoption. And we've talked about there's tens of thousands of labs, potentially in excess of 100,000 labs that could be ultimate users of the single-cell technologies. Given that we've only penetrated a few thousand, there's way, way -- large, large runway for growth for new labs adoption and also within existing labs just looking at the fractions of budgets and how people are spending their money. So we feel very good that this is very early. And a lot of our investments are aimed specifically with the mind of kind of expanding into this large, large opportunity that's ahead. As far as sequencing costs, so that's something that we certainly have benefited. I mean, from the beginning of really the Chromium kind of entry to market. It would have been -- while it would have been impossible to do the single-cell experiments without the way that the sequencing costs have come down prior to 2016. And also since 2016, the kind of the steady decrease in costs has helped adoption. Of course, the single-cell experiments are very sort of almost insatiable in demand for numbers. More cells, more sequencing is always good. And so that is certainly a trend that we've been riding and continue to expect to ride as we expand further.

Got it. Do you see the emergence of competitors like Singular? I mean they -- at some point they want to launch that PX platform, promising sort of more sales per run impacting what essentially has been a white space opportunity for 10x down the road? Or is the Chromium X sort of sufficient to sort of essentially get you ahead of that and make sure that you maintain your competitive edge?

Yes. So a couple of things. So there have definitely been lots of interest in this market in a single cell since really the beginning since 2016, 2017 and continues. New companies have come and gone over this period. And that -- the fundamental dynamic has not really changed, nor do we expect it to change. And our internal goal, right, our internal strategy is to keep investing in innovation and keep investing in customer success. Those are sort of have been the twin pillars of our strategy that have kept all the competition at bay for us, and that's what we expect going forward. As far as Singular specifically is concerned, I mean, I think they're going to -- their focus is going to be -- needs to be on just building a sequencer first and getting to market. I think the single cell and spatial platforms they might come later. Well, that will be something that we can deal with like once those are close to the market, we can talk about more tangibly. We feel good again with the -- especially with the new launches, with the X, like you mentioned, with other products that we have a pretty good set of applications and capabilities around single cell and also all the things we are working internally to give us much longer runway going forward.

Got it. One quick one for Justin here. Obviously, the lower price point on the Chromium last quarter led to a pretty significant spike in placements. Do you expect that sort of -- do you see that as a one-off? Or is that sort of something that's continued given that the price for the legacy instrument, if you will, is still going to be about $35,000?

That's a good question. We now have 4 Chromium instruments in our lineup. We've got the Chromium Controller. We launched that in 2015. That's the vast majority of our placements today. We've got the Connect, which launched in early 2020, and that's designed to automate the workflow and decrease hands on time. And then we have the Chromium X and IX, which were just launched earlier this quarter, basically pushing the boundaries of single cell research. And so going back to last quarter, we started that $35,000 price point on the Chromium controller at the beginning of the second quarter, really ahead of the Chromium X launch. And so at that time, it was a temporary promotion. And by our estimates, it drove about 100 incremental placements in the quarter. And we do think that this included some pull forward as customers were reacting to a lower price point that was expiring at the end of the quarter from their perspective. So I wouldn't expect the level of placements that we saw in the second quarter to be sustained in the near term. It's too early to say what the longer-term impact is going to be though. But with the lower price Chromium Controller, we do have the ability to reach new customers that may have been more price sensitive in the past. And just overall, as far as this quarter, we are seeing good interest in the Chromium X and iX as well.

Got it. And Justin, just following up on the comment you just made on sort of more price-sensitive customers coming into the installed base here. Do you think that sort of drags on the consumables pull-through line a little bit or not really?

Well, it's too early to tell as many of these customers have just received their instrument. And so from our perspective, we're focused on expanding access to the Chromium platform, reaching new labs, bringing new customers into our ecosystem. I think if you have customers that didn't buy the instrument at a higher price point and are now willing to buy it at a lower one, I don't think that you can have the same expectation at least on near-term spend, long term remains to be seen. But I do think the most important thing is, is that we're signing on a lot of new customers and introducing them to single cell, and we'll work to support their ramp over time.

Got it. And Serge, back to you on the iX and the X side of things. Can you share some color on sort of early traction in placements now that customers likely have the box in their hands and are playing around with it. You've previously mentioned that it's going to take some time for these customers to ramp up those high throughput workflows. Over what time frame do you expect the situation to normalize so that investors can get a better sense of what pull-through might look like?

Yes. So there's a few things to kind of unpack in the question. So first of all, from the X and iX have just gotten launched. I mean we literally started training our sales force this quarter on the instrument. And now the sales force is training the customers. So there's -- there's just -- we should monitor the expectations around when the customers will actually beginning these instruments. Only just the first ones are just starting to get them installed and started to run them and the initial runs are all on sort of standard kits to kind of make sure the instrument is getting put through its paces. So the way that we expect this to work is like as customers kind of get on board and get the initial experiments running, like get comfort with the new technology and the instrument, then they will kind of progress on to actual studies with its high throughput or standard throughput and kind of run those experiments. And so you should be thinking in terms of the kind of 6 months plus 2 -- about 2 quarters, 6, 9 months sort of a time frame as people get on to like sort of what would be a more steady ramp but then there is also kind of a secondary time scale of as people start conceptualizing kind of higher throughput experiments, new kinds of experiments they weren't running before, how long will that take for them to get to those kinds of new types of experiments. And that tends to be a longer time frame, where you -- whether it's kind of allocating new budgets or creating -- applying for new grants and getting those grants, now we're thinking in terms of a year or thereabout for -- to get to kind of a new steady state higher ramp -- higher usage all in all.

Got it. Switching to Visium and starting with the FFPE launch, Serge, I mean, is that 6-month period sort of, again, a valid time frame to think about when some of the larger scale experiments might kick off?

I would say to a first approximation, that's a pretty good benchmark to think through because, again, it's a matter of customers getting all their -- kind of getting all their people, getting all their gear in place, running the initial test protocol samples getting comfortable with that and then coming back and kind of going back and actually running larger ones. So it's -- there's a matter of getting ready. There's a matter of running it. There's a matter of analyzing in the end and then going back. And so that's the cycle. So I think -- and empirically, that's what we tend to see when you have kind of a customer coming into the system the first time for them to get comfortable. It takes a couple of quarters until they ramp up.

Got it. Fair enough. And then from a portfolio positioning standpoint, where does HD fit in? So it's 400x sort of higher resolution versus the Visium. You're going to launch it with FFPE capability and all that good stuff. But from a customer standpoint, what will they use sort of Visium for versus Visium HD in terms of use cases?

So Visium HD is like it is getting -- since we started talking about it is getting a lot of resonance from our customers. And it does a nice -- it is essentially the best discovery tool for spatial biology that exists that you can almost imagine because it gives you unlimited multiplex and it gives you a single cell resolution. And so I think a lot of our customers are kind of -- we'll end up seeing that as sort of the flagship product, after which they are going in to the extent that they don't need that single cell resolution. They will step down to a standard Visium that's out there. So I think that's where the world is going. It's not necessarily going to get there immediately. But I think conceptually, that's where things are headed.

Got it. And you mentioned sort of building a new factory in Pleasanton to manufacture these high res Visium consumables. Is that going to be sort of dedicated to HD. And how has progress been tracking here in terms of bringing that facility online?

Yes. So it is -- this facility was built. In fact, the whole -- sort of the whole approach was invented by 10x and built for this purpose specifically for the Visium HD. And one of the things I'd like to point out is that this is one of those projects where we had to innovate tremendously like every step of the way. Just the whole -- the conceptual approach to how you could make sort of these kinds of arrays. We started with the premise that there's a number of microarray technologies that exist out there in the world that could potentially be -- given the feature sizes we know people have been able to achieve that potentially be brought to bear. But as we work through all the requirements of this, we kind of realized that none of the existing real technologies could serve this purpose. And we had to invent. And the team has done a tremendous job of inventing this technology and then inventing all the little bits in sort of all the elements to make it practical. And then building up a factory to deliver it. And so it has been going -- it has been proceeding rapidly, which is especially impressive under the constraints of sort of all the different COVID disruptions. But it's proceeding well, again, aggressive goals, aggressive time lines. But so far, the team has been doing a fantastic job.

Fair to assume sort of a HD launch at AGBT next year?

We -- all we've said is that we're planning it for first half of next year.

Got it. Fair enough. I tried. From a competition standpoint, Serge, the gap between Visium and GeoMx has narrowed with both platforms now doing FFPE and whole transcriptome. In the past, you've spoken about sort of their regional interest approach as one potential sort of like limitation versus whole slide. But then on the other hand, they have a more automated reproducible workflow, which they kind of like point to as a key advantage. In your -- from the point of view of the customer, I mean, are these essentially still complementary technologies? Or do you stop seeing them now sort of stepping on each other's toes more and more?

There's -- well -- so I mean, I think it's kind of -- it's both in terms of there's a certain amount of complementarity and different use cases. But there's certainly much more of a competitive dynamic just by virtue of capabilities that's been forming. Since NanoString released their WTA protocol, which allows you to look at tissue -- the full transcriptome, and we've released the FFPE capability. Now we're sort of able to address potentially similar customers, similar sample types. So the dynamic is there. Having said that, it's still quite early, again, like as FFPE has just been out there for a few months. And we'll see how things play out. We feel, again, confident for all the reasons I've talked about in the past. We're sciences, where the world is looking that people don't necessarily know what they don't know. They'd like to see the full tissue and Visium provides that.

Got it. Walk us through some of the informatics challenges as customers face when dealing with the amount of data generated by spatial, Serge. Are you having any sort of industry-wide sort of conversations around digitizing and sharing of spatial data, essentially sort of creating a Clinmark for spatial?

We think about it. I think they're -- like at this stage, it's still too nascent. I think the technology is -- the underlying sort of technologies are evolving too fast to start standardizing on data formats, I would say. I don't think a lot of it is similar to what was happening in the world of single cell when there's a lot of people innovating in algorithms, innovating on data analysis approaches while the physical technology is also being kind of changing underneath. So it's a challenge. I think it's a challenge that is being addressed by a lot of like innovative academic labs, and we're also certainly investing fairly aggressively in just smoothing out the experience for our customers. So like a lot of logs right now. So I am averse to kind of pushing too fast into standardization too quickly, although those kinds of conversations are certainly happening in anticipation that everyone knows this is going to be -- spatial is going to be huge.

Got it. Protein capabilities. I mean, you already have sort of the IT-based method, but you're planning on developing an antibody oligo-conjugated approach as well for Visium. What would be the differences across the 2? And why do you think -- who do you think this capability would appeal to most?

So the difference between -- so oligo conjugate antibodies and IHC is there is plex level. You should be able to do -- with IHC you can do one or a couple antibodies. With the Feature Barcoding approach that we use with oligo conjugate antibodies, you can go to much higher plex levels. I mean there are challenges with that as well. But internally, we have seen really high numbers. And so that goes to kind of certainly very interesting to our core customers. The people -- kind of the genomics people who want to kind of understand what's going on the protein level. They commented from the perspective of wanting higher plex kind of always the discoveries which is the protein. I think the traditional tissue people are certainly interested. They're used to work in a lower plex kind of environment. But certainly, now that sort of a lot of single cell findings are coming aboard, being able to measure more proteins simultaneously from a same tissue is very useful and requires kind of less work in making multiple slices and so on. So definitely, I think it's going to be very appealing across the board, very powerful.

Got it. And how do you think about CytAssist? I mean CytAssist in terms of sample prep for spatial side of things. I mean, where do you see the most uptake for that device?

I think it's going to be quite important. Again, it's not going to be necessary for running Visium just like we have it now. But I think to scaling up to really large numbers of samples, especially biobank samples, especially kind of overcoming a challenge of the fact that tissue people aren't traditionally used to work with molecular biology people, which, again, we need to overcome the challenge to really kind of scale the spot, CytAssist is going to be essential. So we're very excited about it. Again, lots of customers, especially people who are sort of coming from the tissue side of the world, I think they're particularly excited.

Got it. Switching to the NC2 imager. Before we get into the weeds on your plans there, can you just remind us why NC2 profiling and subcellular 3D resolution matters and in what context? And in what sense do you view this as a complementary solution to a product like Visium HD?

So the way that we think about NC2 is you can imagine that a lot of discovery work is happening, will happen with the Chromium and Visium platform. And you discover your gene signatures with those platforms and then to kind of to validate them and to characterize like yourselves and more tissues using orthogonal method NC2 is kind of the right approach, right? And that's like when you think about the research applications, that's how it's been used so far. We've got -- when we first announced our acquisition of CARTANA a year ago, there was a paper that used literally used Visium and together with CARTANA approach as validation. And so we see that as being kind of a natural, again, orthogonal confirmation of findings you see with Visium. And in a different format, in a format that's fully integrated and therefore has more of a -- it's particularly suitable for us, but somewhat lower plex levels of markers compared to Visium and Chromium. So that's where we see those kind of positioned. Ultimately, I should say, like as we think kind of much longer term, as we think in terms of single-cell approaches making their way into the clinic, especially when you start with tissue, and you start thinking in terms of what might that entail in kind of making this kind of a list of requirements. Given what we now know about the importance of single-cell approach as well, you'd want something and if you want to have a clinical instrument, clinical technology, something that gives you a single cell and spatial context, you would need something that will give you sufficient plex levels to be able to differentiate different cell types in different cell states. And you want something that's an integrated platform in a way that's reasonably familiar to pathologists and clinicians out there. And so once you check out the list of requirements, you converge into NC2 technology as the right way to do this. And so that's how we see it in the long term and why we are so excited about its potential.

Got it. So there's a whole bunch of competitors looking to enter that market. You've got sort of NanoString, but you've also got Resolved, Vizgen, Rebus et cetera, with varying levels of plex. I mean you've got people like Fluidigm, Multiview, even Akoya. So beyond the folks who value 1,000 plex, like what do you view as the sweet spot for the NC2 imager that you guys want to bring to market? Do you think there's a meaningful first-mover advantage in this market, just given the CapEx dollar angle here?

So a few things. One, our view is that this -- we're building a platform with many products, right? And different applications will likely entail different sets of specs and different configuration specs. And again, our goal is to -- we take, as always, a long-term view, and it's not just like we're looking to bring the first product. There's going to be multiple products and multiple applications. And from the beginning, we kind of -- that was our strategy, and we developed a set of assets internally and capability internally to be able to deliver kind of a full range of products over time to the marketplace for all the different applications. So that is the approach that we're taking going forward. Sorry, what was the second part of your question?

It was just on whether there will be a meaningful sort of first mover advantage because of the CapEx angle.

Not immediately. I doubt for the next couple of years is going to be much of an advantage. I think our space generally, is great in that the best product, best technology usually wins, especially with the periods of high flux, which does it certainly is and is going to be for the next several years. And so we feel pretty confident that we have, again, the capabilities and the tools at our disposable to deliver the best -- a range of best-in-class products on this platform.

Got it. Any key learnings to date in terms of what customers want in terms of tissue type, number of targets, many software, et cetera?

They want it all. Yes. I mean, look, again, it depends a bit like which customers you're talking about. And they're all important, and they have various trade-offs between themselves, whether it's multi-plex level, sensitivity, throughput, workflow, data analysis. This technology for sure, like just the virtual amount of data that is generating -- that's generated is going to be quite intensive in terms of data analysis needs. And so we're fully also cognizant of that, and we're investing aggressively on the software side. And that's something that also gives us some measure of confidence because we feel like we have kind of great capabilities on that on analytic side.

Got it. And then any updates on how the CARTANA Early Access program has gone so far?

It's going well. We're kind of consistently have more demand than we can meet. So it's always been needed even as we've tried to kind of hire up to do more. So far, I mean one thing I'd like to remind is that again is the chemistry, the chemistry that we're using is not what we will be releasing ultimately with our set of products. This is the CARTANA chemistry, which we've been evolving since that point. But so far so good range of customer types and certainly a lot of interest, which is not surprising, we noticed in single and spatial in general is quite -- it's quite of interest to people now.

And in terms of the platform development effort itself Serge, I mean, on NC2, what remains to be done ahead of launch? And is it fair to assume that you'll probably start with the tech access program before a broader rollout?

So we haven't really talked about any specifics of our launch plans or really so far what we've done in terms of development. We've integrated the 3 teams from 3 companies, CARTANA, ReadCoor and 10x, and that's kind of -- it's a large development effort. We feel good about where we are. We made lots of progress, but not really to talk about any specifics at this stage.

Got it. One for Justin here. On the second quarter call, you spoke about sort of customer labs returning to near normal levels of activity, but then you have the uncertainty around COVID case counts and emerging variants that sort of picked up in August and September. How are you thinking about sort of customers reinstating COVID protocols, perhaps restricting site access? And what's the environment been looking like in August and the first couple of weeks of September here?

So going back to our Q2 call in August, we did talk about how we saw an improvement at the end of the quarter -- at the end of June in regards to customer lab operations. And at the same time, we also highlighted the increased risks and uncertainty that we were seeing in Q3 related to the emergence of the Delta variant as you mentioned, as some customer labs started reinstating COVID protocols and restricting access to visitors again. And really, since that time, it does feel like just more broadly. We've taken a step backwards from where we were in June, July. It's impacted us and that we have seen a slower start to the quarter. And in particular, the month of August in general, was slower than our expectations. We do generally see some intra-quarter seasonality in August, but it was magnified this year, and it does appear to have continued into the first week of September. There's still a few weeks left in the quarter. More recently, we have seen a pickup in quotes, orders and sales activity, which is encouraging. And so we'll see how the next few weeks progress as we close out the quarter. But despite this impact, engagement with customers has remained strong. enthusiasm for our new products appears to be high, and our conviction in the long-term opportunity remains as strong as ever.

Got it. And Justin, just sort of unpacking that a little bit, I mean, is it more around sort of site access where it's related to more your ability to place more instruments? Or is it more a consumable slowdown where because of social distancing protocols and whatnot, these labs are just operating at suboptimal capacity levels.

Yes. I think the 2 biggest impacts are the capacity of the lab due to protocols just not being able to do as much work as they were previously and then taking a step back from where they were earlier. And then also just on site access, and this is particularly important to our new customers, where it's good to have a rep who's there with them as they're onboarding a new technology. And just due to the site restrictions, we're still doing that, but it's remote, and it's not the same as doing it in person.

Got it. How are you thinking about any signs of supply chain disruption or rising inflationary pressures on the business, Justin?

So we are seeing some risk. We're managing it. So we're seeing risk on the pricing side. it hasn't impacted us yet. But just looking more broadly across just the raw material suppliers that we use. We know that they're facing some challenges as well. And so it's something that we're continuing to monitor and continuing to manage, but the risk is definitely there.

Got it. We are almost out of time. But before we go Serge, as you look out to 2022 and beyond, I mean, what about sort of that next 2 to 3 years for 10x excites you the most? And what part of the story do you think is most underappreciated by investors today?

So as I look to '22, so it's always hard to pick like the single thing here because we have a number of efforts going. I think people oftentimes under appreciate just how much runway single cell by itself has. Again, the point you made at the start of this conversation, that people are focused on spatial, but single cell is still very, very early in this innings, and so there's so much more potential to go forward. The other thing I would just emphasize is the company, 10x is very much about the capabilities that we've built and less so about any specific technology or any particular spec. And so as we think about spatial especially in situ, that's the mindset we're taking. It's not optimizing for any particular product, any particular time frame, but having the right set of capabilities to win this over the long run.

Got it. We'll leave it there. This was a great overview. So thanks to you both for your time, and we'll talk to you soon.

Thank you.

Thank you.