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

Great. Welcome, afternoon of day 1 at the 42nd Annual Cowen Healthcare Conference. I'm pleased to be at Cowen having joined recently, Dan Brennan, one of the 3 tools and diagnostics analysts, and really pleased to be joined with me here on the virtual stage with the senior management team of 10x Genomics. We have Serge Saxonov, CEO; and we have Justin McAnear, the Chief Financial Officer. Obviously, I have questions prepared to go through, but feel free to shoot me an e-mail or a question -- excuse me, on the chat, and I'll certainly see if I can address it within the 30 minutes here. So first off, Serge and Justin, thanks for participating.

Thanks for having us, Dan.

Thanks. Glad to be here.

So I was mentioning on the precall, like 10x has generated a tremendous amount of interest, not -- always, but certainly with the price dislocation recently, there's a lot more interest in trying to see what kind of an opportunity this is. So I think this will be a really interesting discussion. I thought I'd started off just with the outlook you provided very recently on 2022, $630 million in light of consensus but represents 26% growth, which was a deceleration from higher levels in prior years. You said on numerous factors, Omicron demand, new product timing delays, slower conversion of halo customers. Just kind of give us a sense, I mean, if we -- if it was possible absent these issues, like what's the rate of growth like you think you can achieve in 2022? Just trying to looking for like what the level of like the trend line growth that we should be thinking about for 10x? And related to that, kind of what kind of feedback do you have for investors who might be worried about kind of the slower growth persistency?

I'll start with that one, Dan. So it's a little difficult to imagine an alternative world and comment on different what-if scenarios. And just to start, just to clarify point in your question, we said that on average, recent customer cohorts have been ramping their consumable utilization somewhat slower than our earlier cohorts, not so much commenting on a slower conversion of halo customers. Regarding the guidance range, we put a lot of thought into that range that we shared just a little bit over 2 weeks ago. And as we shared on the call, we're really bullish about the opportunity ahead, but we have seen some headwinds that are going to temporarily impact our growth in 2022, most notably in the first quarter. And so our range, it reflects solid growth with new and existing customers, offset by some of these near-term headwinds. And as we said on the call, these near-term headwinds include the ongoing impact of Omicron in the first quarter, particularly with the academic customers. The second was recent customer cohorts have been ramping their utilization somewhat slower than the earlier cohorts. And third, we're accelerating the product development of our Xenium platform, which has delayed the timing of some other product launches.

Maybe kind of sticking on the high level a little bit before we dig into the details, more like on a modeling basis. I know the company has talked about as spatial gets to be a bigger component of the business, you would look to potentially break that out or maybe it's more meaningful that we can kind of derive insight from that. Is that expected to come this year? Just kind of walk us through a little bit from a kind of transparency basis, how we might think about the business from what we could see from our end?

Yes. So as far as our different product lines, including spatial, at some point, we expect to talk about revenue by platform. We try to give metrics that are meaningful. But in the early days of a product launch ramp up, there are a lot of drivers that can impact those metrics. For Bresenium or -- for Visium specifically, we have CytAssist coming later this year. We have Visium HD coming. And given that those are coming out this year, we expect that at some point after that, we'll be talking, we could potentially start breaking out revenue by platform and speaking more specifically the growth drivers by platform.

And then maybe one more on the top down. Obviously, awful tragic events going on over in Eastern Europe with what Russia is doing in the Ukraine. From a revenue standpoint, could you just discuss kind of what your exposure is to those regions? And could those -- could this have an impact on the first quarter of 2022 outlook?

Yes. So to start, it's a tragic and complex situation, and we're monitoring it closely. We do have some sales there. Overall, it's not material to the business when you're looking at it relative to the total revenue. But as the situation develops regarding impacts to our business, the bigger concern down the road could be supply chain impacts.

Got it. Supply chain impacts. Okay. Okay. Maybe a couple of questions on the big picture in kind of single cell, and then we're going to dig into the factors that you mentioned and how we think about the trajectory in 2022. Just I think it's expect-- or it's well understood, you're kind of dominant position in single cell. Just kind of maybe what does that look like today? Is -- we know there are maybe some other private players, they don't have a box. I know they've been around for a while. I'm just wondering what the competitive dynamics are in single cell and kind of how do you feel about your positioning going forward?

Yes. So I'll take that one. So we've been in a strong position in single cell with a common franchise for a number of years now. And the key there has been for us since the beginning, invest in innovation and invest in customer relationships and partnerships. And that -- the story has been kind of pretty consistent across the years. We have innovated. We have introduced new product features, new applications, push the specs up, and increased our sort of market position. Nothing has -- and there has been a consistent flux of kind of new companies trying to come into the space and coming in and out. And again, that has not really materially changed. I would say, if anything, our leadership has probably grown relative to a number of years ago, again, just by virtue of all the -- like the breadth of applications that we have and the feature set that we keep pressing. So -- and also the customer base. So I would say that's kind of the current state of play on single cell side.

And I think one thing that kind of came up a lot after the fourth quarter was given the extremely -- or perceived very low penetration of single cell today and the growth opportunity, folks were just trying to figure out if something wrong? Is there any saturation issues in single cell? So maybe give us a flavor again of kind of where are we stand today with single cell? I know you have a lot of information in your slide deck that you typically put out in terms of penetration. But how do we think about where we sit today and kind of what the addressable market is growing at, say, over the next 5 years?

Yes. I mean all the fundamental drivers seem really strong and all kind of pointing in one direction. I've said this a bunch in the past, we still say that we see plenty of evidence like we see kind of where the world is going, it's all going in one direction. It's pretty unique directional. We kind of see that demand basically just about all of research, certainly, if you're starting with tissue or cells has to be done in a single cell with single-cell context. And it's all going in that one direction. When we look at our customer base, when you look at our existing customers, even though all those customers are still ramping their usage at a pretty robust rate. And then we keep adding new customers. And when you look at just the potential universe of new customers, like you mentioned, still like there's -- I mean, it's very, very large, whether you look at mainstream biologists, you look at translational researchers, you're looking at biopharma, there's lots and lots of new customers to go after. And then you also kind of think in terms of product unlocks that we could -- we have been launching, and we will keep launching to kind of do further leading into an accelerate kind of really bottlenecks and accelerate the penetration. So from -- just within the single cell franchise, we see that we're still very, very much early kind of in this trajectory. There's going to be ups and downs, obviously, [indiscernible] transitory effects quarter-to-quarter for sure, but the long-term picture is as robust as it has ever been. And there is more empirical evidence for adhesives than there has ever been.

And I did have one quick follow-up which kind of to Justin's comments at the beginning. So in terms of the supply chain issues, Justin, like is that something like could you elaborate a little bit on that? Is that happening now? And how do we think about what that might portend for later in the year?

Yes. So these have been ongoing risks really in the COVID environment that we've been dealing with. And so from even the supply chain impacts as far as those that have impacted our customers such as tips, to raw materials that we use in manufacturing our products. We've been managing these risks. We've been carrying more inventory. We've been buying ahead. We've been securing alternative vendors as backups and doing everything that we can to mitigate that. But in the event that this would escalate and there were impacts on the supply chain as a whole, I think that there is additional risk there.

Okay. So I think, Serge or Justin I think on the call you guys talked about grants up 40% CAGR, supporting single cell. Is that the right way to think about the addressable growth rate of this industry? Again, we're not going to plug it into a model, it's going to be box imposed, but just how do we think about what your end markets are growing and that you're selling into?

So we used this -- some of these kind of statistics around grants application such as is a good directional sort of data point. It's not a just positive data point [indiscernible] touch like it doesn't directly -- whatever the numbers come through an age don't direct [indiscernible] there's lots of other links in that chain. But as directionally, what we -- where we get confident and agrees with our kind of other data points that we see in the market is that there's plenty of robust growth in this market going forward. Certainly, we see that trajectory looking backwards, but we also anticipate going forward as well.

And then maybe one more before we jump into some of the distinct drivers, if you will, for '22. So -- and you and I have discussed this a little bit on kind of prior calls, but sequencing, when we talked about Illumina planning to roll out Chromium X and that's going to drop prices, who knows how much maybe 50% or so, I believe sequencing wasn't as big a part of the overall cost of running single cell. So while it's important, it's not that important. But however, I just wonder at the high end, when you're doing really large experiments, we understand sequencing is a much bigger component. So maybe as pricing begins to get more competitive in sequencing vis-a-vis Illumina and peers, how do we think about the potential impact on your business as we look out?

Yes. No, that's a really interesting question on point. Like when we first launched a single cell product back, however, many years ago, we kind of said the pricing to be roughly 1:1. And as you alluded to, due to kind of various sequencing prices kind of dropping, our product efficiency -- chemistry efficiency increasing, the ratio kind of drifted a little bit down. But now on the high throughput side of the equation where the latest recent HD launches and CellPlexing launches, that kind of shifted more toward parity. And so when it shifts more [indiscernible] changes in sequencing price actually have more in effect because our customers look at the total price of experiment as when deciding what to run. So -- and as we mentioned on the call too, the high throughput kits have been taking off significantly. The product has been taken off significantly faster than we initially anticipated. So I think that is -- that points to the potential on that front and kind of goes along pretty well with what if prices on sequencing -- on the sequencing side start coming down significantly. I think that will go along quite well with what we're seeing in the market in terms of the trajectory with these high-throughput consumables. And so I think they should act pretty synergistically in terms of reducing cost of experiment for our customers. And ultimately, I think that should drive a lot more demand because again, the goal, what we see kind of happening over the medium and long term is that the bulk of biological experimentation should really convert to single-cell context. And that's what will drive -- partially what will drive that dynamic.

Maybe if we flip a little bit into like the '22 trends and outlook, I think one of the factors that you discussed on the most recent call was you're pulling forward Xenium some of the other new product introductions got delayed a bit. Just kind of give us a sense of that decision point. Again, I know it was addressed on the call. I think Xenium has a lot of interest from customers and at the same time, maybe manpower or people power wasn't able to kind of maintain kind of time lines from these other products. But just in total, walk through that decision point? How do we think about the impact from new products within your '22 guidance?

Yes. So maybe I'll start there, Justin, you can comment towards the end in fact. So the decision was actually kind of happened throughout 2021 and then into the early '22. So it wasn't just like a onetime sort of thing. We kept -- we obviously had very strong conviction around In Situ space going back a long time ago. That's why we made acquisitions were made back in the day. And we've been kind of investing and building towards the products and the launch of the platform on the In Situ for some amount of time. But throughout '21, we've heard from our customers more and more intense interest in the platform and the capabilities. And so we kept putting more and more resources into the Xenium platform. And when we earlier this [indiscernible] kind of so passed launching the platform [indiscernible] we took that path. Now -- we're a significant company. At the same time, we do have lots of projects going and lots of -- like, I mean, these are fundamental sophisticated platforms, Chromium, Visium, Xenium, they all required resource -- require lots of different kinds of resources. And in the end, if you think even though our R&D team is quite sizable, there's only so many people you have in any given one discipline, whether you're looking at firm or engineering, you look at bioinformatics, you're looking at chemistry, looking at enzymology. And so there's always trade as you end up making. So in the end, we decided to pull forward the Xenium launch that put some amount of pressure on -- across our entire product line and some of the -- there are sort of modest delays that we had across other products. It's really not Xenium versus anything else, but it's about Xenium and making some of those choices across the rest of the products.

And just to add to that, we saw a path to accelerate Xenium to get it to market quicker. And with the other product launch slippages, typically, when a new product launches, it builds up over time. So there's not a huge impact in the quarter that it launches. But with some of these that we're launching earlier in the year, there is an impact to 2022. And then as far as Xenium goes, pulling that forward, there's not a material impact to 2022 revenue due to the Xenium launch. It's going to be end of year. It's going to be a relatively smaller number of placements with early customers, and we're going to be focused on making those early customers successful.

And maybe can you go into the new products a bit between the fixed RNA, which I know you've been really excited about what that could mean BEAM and then also the HD just it feels like there should be a lot of momentum as we get into '23 from the benefit of these new products. But just kind of walk us through a little bit of how we should think about maybe the contribution or impact of these products?

So I think Justin is right, in terms of like all new products, especially at this level with our current level of revenue, like the first couple of quarters are always going to be quite modest in terms of the impact. And then it takes 2-plus quarters for things to kind of ramp up for it to become more significant. So that's why I question on all of those launches. The most imminent one -- the biggest one we've talked about was fixed RNA profiling again coming about midyear this year. We do -- we are excited because it gets to one of the major points -- one of the things that's -- I think probably most misunderstood sort of less well understood about the business about single-cell business is the fact that you deal with live tissues, and it poses pretty like pretty intense logistical constraints of when and how you can run those experiments and ability to fix your sample at the point of collection becomes a pretty big unlock enabler. In many ways, not open times as sexy as a brand-new capability brand-new analyze, but it has huge potential in terms of unlocking new use cases and bringing new customers into the fold especially on translational side. So we see this as -- it has a lot of potential plus, the product itself has a number of really key features, whether it's kind of more flexible sensitivity or more straightforward multiplexing samples. That said, it's a different kind of a chemistry than what we've used before with our flagship gene expression products. So there's going to be some amount of comparisons that our customers are going to need to run to compare the chemistry versus the previous chemistry before they start converting. So that's the first, as you mentioned, the big one on the Chromium side that we've been interest -- we've been excited by. We also mentioned last week in our experience workshop there's going to be a new kit coming out on nuclear prep, again, another example of something that might not be a sexy as bringing out a new analyte, but it actually has potential to simplify a fair amount of sample prep challenges that people have. Then you mentioned BEAM, this is an example of us going kind of a bit more downstream into the application space, specifically for -- to enable really revolution as potentially antibody -- the process of antibody discovery and T cell discovery. This capability has existed in a sort of more raw formed since we launched the feature barcoding application on the new profiling product, but it's been throttled by the fact that people have not been able to really be able to run the antigen mapping at scale. And a lot of our customers, especially the biotech side, have been asking for this. So excited, second half of the year has potential with a specific customer set to be very, very enabling breakthrough. And then on the Visium side, you mentioned Visium HD again coming to the end of the year, lots and lots of interest in that for sure and CytAssist is the other one. And again, on the theme of workflow enablement and simplifying the logistics, it's going to be -- we see a lot of interest from our customer base around that instrument around that product.

And is it possible before you move past new products like on the fixed RNA since it could -- it sounds like you could do a couple of things. You could certainly open up new cost measure saying and at the same time, maybe possibly even increase sample volume because maybe you're not as tied to like having to have everyone in the lab at the same time where they need to be. So can you just give us a sense of -- I don't know if you've shared any thoughts about the -- again, not dialing something into your revenue base when you think about the size, does it open up 25% of a customer base that you haven't touched before? And anything about the impact on volumes, not to say it's going to impact you this year or next year, but just theoretically what this could mean?

Yes. I mean, I hesitate to give any specific numbers given that the product hasn't even launched and it's always the question of what -- how does it do in the field what costs how like it's the match of the product capability with the customer needs. And until it's out there, it's always hard to comment. But I think our -- the potential there is quite transformative -- and I would say, new customers, quite often, it's customers who have like started kind of using single cell but have been challenged to scale up, right, for this reason where it's hard to -- because of all the logistical constraints, you can do one sample at a time or a few samples. But it's hard to run real large campaigns. And we further -- especially from our biotech and pharma customers, where they've got samples open times come from many different sites, and it's not feasible to put Chromium at the site of sample collection, especially the expertise to do the appropriate amount of appreciation cell clarification and running the Chromium. And so it opens up that potentially a multiplicative effect in terms of sample accessibility. I would emphasize that. Again, the customers are probably, to a large extent, are already there, and we're interested, but just prevented from really being able to adopt at scale.

Maybe one more on Chromium side and then we'll jump over to Visium and we can always circle back. So maybe pull through and maybe this will be addressed as well with the commentary about what kind of -- what was impacted in the quarter and the guide about some of the newer customers. But pull through, we're coming up with like $135,000 per box in 2022 and obviously starting a lot lower in 1Q. Just kind of wondering how we should be -- is that kind of -- is that kind of the right way to think about it? And then as we think about pull-through growth, what is the right way to kind of consider your annual rate of kind of pull-through expense? I know with a lot of competing products. It's hard to give that number, but just it's an important metric for us. So if you can help explain like the pull-through potential for Chromium?

Yes. So on our most recent earnings call, we talked about pull-through some. And just how as the business has become more complex with multiple instruments out there now, somewhat of a replacement cycle at the beginning of one with Chromium X and iX. They're really looking at total installed base and pull-through. Really, it's an oversimplification of a lot of different inputs. And if you focus on that, it could lead you to draw the wrong conclusion. So for those reasons, we don't manage the pull-through nor do we guide to it. We focus on overall consumable usage overall and the number of reactions run through our systems. And we talked about reactions a little bit on the call as well. And so just going forward -- going forward from Q1 into later this year. We talked about Q1 and the reasons why Q1 has been impacted. But when you look at the waiting that we talked about, like basically a 40-60 waiting from first half of the year, second half of the year. Really, it's a steady ramp from Q1 into the later part of the year.

Okay. So maybe switching over to Visium. I know you haven't broken it out yet, but is it possible to comment on like is $10 million of total Visium revenue is that in the ballpark? Or have you not shared any color about sizing that business?

Yes. So we haven't shared any color on size in that business. We don't break out specific applications on their own. And like I said, I anticipate that in the future when we have multiple applications under the Spatial platform that we'll be talking about that platform in total, specifically separate from Chromium and then eventually in C2 as well.

So maybe discuss the opportunity for Xenium and kind of how you think it's going to compare. You've got -- you've got cosmics kind of getting to the market. There's a lot more competition on the private side coming in this part of the market, but there seems to be a tremendous amount of excitement. Just walk us through a little bit about like Xenium, the profile and the opportunity?

Yes. No. I mean, as I mentioned earlier, like we certainly believed in In Situ potential for quite a number of years now. and have been working -- have been investing internally, have been and made the acquisitions as well to kind of build -- bring technology and intellectual properties into the fold. So that conviction has been there has not changed. And in fact, has gotten, if anything, has gotten reinforced. What has also changed in the last 2 years is that just has been so much more intense interest from customers and new entrants. And I think those 2 things are interim clients, right? There's a whole lot of, like you mentioned, startups that have come into the fold and NanoString is now talking about launching their platform as well. So lots and lots of kind of activity in the market. I would say the thing that we always sell consistently. This is not an easy platform to roll out and to build and to support. It's a center building a sequencer, but one that has to work on tissue. And so in all kinds of biological environments, tissues all do their own things, different sample paths, and so on. And one of the biggest, biggest challenge is going to be robustness, right? And especially robustness allows for a sufficient throughput to make this a commercially viable platform. And so that's where we've invested consistently from the beginning, again, so this notion of being able to run it consistently at high throughput with robustness across samples across tissues, across labs. We also see one of the -- one of the things we're hearing from our customers with a huge value proposition is the fact that -- we -- this is a platform. We will keep investing is going to be a whole kind of cadence of innovation that will mirror what we've done in the past with Chromium and now doing with Visium. And that gives our customers comfort and this notion that they can invest in the platform for the long term. It also -- the other thing that's also something that will be a great sort of value proposition to our customers is the fact that we have all 3 platforms under one roof. And a lot of the workloads actually make use for In Situ currently make use of data that's generated on a single cell side and then being merged with this In Situ technologies. And it's probably no one in the universe that has a better sense of the data and the issues that come up when you're trying to interpret and make yourself single cell data together with In Situ.

And in terms of Visium and Xenium, like obviously, Visium on the market, it's commercialized. -- you're rolling out additional products. Like are they both equally attractive as one at this juncture, do you view it to be maybe a bigger opportunity given the customer feedback that you're seeing?

So I would say on the -- in the long run, we see Xenium as a large opportunity. But in kind of in the near to medium term, we're really excited about Visium. There's no other platform that has unbiased ability like nothing in the near-term horizon that has this ability to measure tissues, all tissues in an unbiased fashion. It's the ideal discovery platform for translational research. And nothing -- again, all the incision technologies are out there are not going to be able to do that at this stage for a long time really. So that's why we are really -- I mean, they're complementary, they fundamentally complementary and investing aggressively in the Visium platform and see huge amounts of excitement around it as well.

And on the Visium side, you've got a number of new products -- you had the FFPE protein, you're going to have the HD. So the product portfolio is continuing to expand. I guess the question is there, has the launch -- since you've launched a product, has it kind of gone as expected? And as we look ahead now with this products we enhance, would you anticipate maybe seeing even greater traction? Obviously, you see greater traction of products. But from a competitive standpoint, it feels like the market is growing well. NanoString is doing fine. They're doing great actually. So I'm just wondering with your enhanced product portfolio, does it make you that much more formidable? Do you see the opportunity to capture more share?

So there's several kind of points [indiscernible] question there. So first of all, it has been growing robustly, especially recently. I think one of the things that going back 2 years ago when we first introduced the platform, one of the things that has -- that was really exciting to us is the fact that it's bringing 2 worlds together, kind of the world of genomics, molecular biology, and histology and tissue, but that also presented a huge logistical challenge because you have the coordinate between people who are never used to working with each other. And despite that the platform has gained -- has been growing really robustly now with all the new additions that we're bringing to market that will a, address those fundamental challenges and b, kind of lean into the things that customers really have grown to like to want and to have the feedback they've given us in terms of what else they want from the platform. So we feel really good about it. I think the space of spatial -- biology spatial genomics is very large, obviously, emerging. So lots of customers, lots of customer types and lots of applications. Our goal is to build up the full kind of feature stack to ultimately to compete for every customer. And we feel good about where things are now getting set up to do that.

And maybe a final question since we restrict the timeline. So as you look at the stock at these levels, what do you think investors maybe are missing or just maybe not -- not really appreciating about the outlook, whether it be for '22 or in the longer term?

So there's maybe 2 things I'll point out. 10x has always been about building out capabilities like fundamental capability around our innovation engine. -- and our relationships with customers. So it's not about any particular product, any particular feature, not even any particular platform. It's about the capabilities. That's how we have -- we've built products that are meant to be -- to fundamentally change biology. This is not for any particular initiative, and we build the capabilities to solve problems for our customers. That's one thing. The other thing I would just emphasize again, like what I said earlier on the call. When we look at where single-cells had or you can kind of take a larger kind of view of single cell context to include spatial biology, it's all going in one direction. There might be sort of perturbations along the way, whether it comes from macro, whether it comes from sort of different bottlenecks that you kind of in contrast, you kind of progress through the market, but it's all going one way. And our goal and all our capabilities is set up to capture that future.

Well Serge and Justin, thanks a lot for being here. Thanks, everyone on the video and have a great rest of the conference.