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

Welcome. Day 2 of the TD Cowen Global Healthcare Conference. I'm Dan Brennan, tools diagnostics analyst. Really pleased to be joined with me on stage, senior management from 10x Genomics. We have Serge Saxonov, CEO; and to his left, Justin McAnear, CFO. So Serge and Justin, welcome.

Glad to be here. Thank you.

Thanks Dan, Glad to be here.

And then we're actually -- just for the people in the audience we're following this -- 10 minutes after this with a panel on single cell spatial in 1 of the ballroom here. So we have 4 experts -- 3 experts speaking here.

So anyway, maybe Serge, busy start to the year. You had some new product announcements. You recently reported the quarter. Maybe you can just kind of kick it off with giving us your perspective on '24, some of the key priorities. Serge and Justin.

Yes, started the year with multiple product launches. It's kind of interesting how it happens. So first, with the Visium HD, it's a big transformational launch on our Visium platform. Is going to -- we talked about it shipping this quarter. We announced 3 weeks ago, a new architecture for our product line, GEM-X. So new products coming out also this quarter. So a big change there. And also, we talked about our Xenium road map. So a lot of products on that side starting this quarter as well. So big, very rich in product development and product launches here. So our first focus right now is to make sure those launches are successful. It's always -- there's always some amount of challenge in terms of getting the information, getting the commercial team prepared for the launches and then getting our customers prepared and internalize all the features and all the new capabilities. So that's key. We've talked about last year and this year, a lot more around Chromium and specifically prioritizing that franchise. Over the last couple of years a lot of our company's focus has been on spatial, especially with Xenium. And last year was the launch for the Xenium platform. That has gone really, really well. We've put a lot of focus on the commercial side to make sure it went well. And now as we enter this year, as Spatial is kind of on a good trajectory also to make sure we put the resources attention on the Chromium franchise. And then finally, we've also -- over the last couple of years, we've been very good at driving spend discipline and cash discipline and 1 of the priorities for us for this year is to keep driving and to keep maintaining that focus. And I think we're in a really, really good spot to do that and to take advantage of the financial health of the company so that all the cash that we do generate and we can reinvest back into the growth of the business.

Maybe just sticking with GEM-X and Visium just for a moment and to such important products. Just what's been GEM-X, you have higher quality. So there's a lot of features that drives improved quality also kind of lower the cost on a per selling, per sample basis. In the Visium HD, just better resolution, certainly has a step-up in kind of price as well. So just I don't know what's been the early reaction on the GEM-X side, and kind of remind us within the context of your guidance for '24, how does GEM-X fit into that guidance?

So the reaction, again, it's very early. We're still in that initial sort of transient phase where we're getting -- the field our customers informed of the launch of the products. The reaction has been very positive. It was initial positive from our field teams who were really excited about the future. So now seeing it from a customer as well has been really validating as well. It has a number of advantages over the current generation of products. Higher sell throughput, higher sensitivity, lower multiple rates, high robustness, and we're also launching it with a lower price per sample and substantially lower price per cell. So all of that is resonating really well with customers. People do need to kind of figure out when to adopt this platform in terms of their ongoing studies and future projects and planning for those. So that is something that we are cognizant of and watching. But overall sentiment still very early days, is quite positive.

And kind of with the benefit of GEM-X and look at the Visium HD then we can dig in. So but the benefit there besides in terms of a financial impact, it obviously probably should be stickier because the quality is higher, right? So customers are going to like it better and maybe you kind of even gain more share with it. But do you think from a usage standpoint, like how does it, you lower the cost? Would you expect people to kind of still kind of spend their budget and just do more -- kind of do more things with it? Or just maybe how do we think about from those factors?

So there's going to be a sort of multiple -- there are several different factors in different use cases. In the short term, you're going to have customers, and we're seeing samples of all of those were they've got budgets that are allocated and are going to spend those budgets. And now that the price point is lower, they can run more samples, right? And so they're going to spend some. Some customers have studies that have a particular number of samples. And they just straight up over to GEM-X, then they spend less because of that. And some customers will think -- start thinking of new studies and new projects and larger projects, too. So they end up spending more. Now that effect has to sort of take longer to play out. Ultimately, we very strongly believe and we have evidence of that in the elasticity -- price elasticity in the marketplace. And so our strong view is that in the long run, ultimately, these price reductions lead to larger markets and add more revenue, more dollars to the company. So...

And we contemplated these dynamics in our guidance range when we put that out on our earnings call. And also, we gave additional detail around how we were thinking about seasonality this year, in particular Q1, with having a lower weighting of the overall annual revenue within Q1 just due to some of these transitionary factors.

And terminally on Visium HD then, that one, I think has been talked about a lot more, right? I think there's been more expectation of it coming. And now that it's out, the features are out, just kind of -- we've done some early checks on it, but just wondering what the feedback is from the salesforce and/or any early customer feedback in terms of some of those same dynamics like what do they really like about it -- from the -- at a higher cost? Could that drive a nice kind of inflection in your Visium franchise? Just any thoughts about that?

Yes. So HD has been both the most requested feature, the high resolution has been the most regressive feature, certainly on the Visium platform, maybe across all of our platforms, and it has been the most requested products since we've started talking about it some time ago, has been probably by far our most requested in fact, product. And so definitely it was met with a lot of enthusiasm, our early announcement this quarter that it is actually -- it's going to be that it's launching, and it's going to be shipping soon. A lot of customers are excited about it. I think it's not quite as straightforward the conversion from standard Visium on to HD as maybe onto the GEM-X because there is a higher price. You're gaining huge increase in resolution, but it is going to cost people more. That said, a lot of people have been waiting on the sidelines before jumping into Visium and to Spatial in anticipation or in the desire for higher resolution. So I think it is going to bring a lot of new -- sort of new people, but also a lot of new projects into the fall, and we're seeing that for sure. There is going to be some period of transition where some customers have to kind of sort their figure out precisely what they need. And -- but we are very bullish on HD and the reception so far from customers has been quite strong from the field and from the customers.

And like if you talk about, let's say, 100 customers like are going to sign up for Visium HD, like how many of those are new customers that didn't like Visium or didn't think the resolution was high enough and Xenium just didn't fit their profile. I'm trying to think through the profile, how much is this Visium upgrade? How much is kind of new to Spatial and just this fits a new category for you? Just...

So I think initially, our focus is going to be on our current customers. In fact, in March of last year, we drove instrument placements, site-assist placements in anticipation of the HD launch, and people who -- a lot of people bought the site-assist in anticipation of being about HD. And that's a prerequisite right now as well. So I think our focus right now, and I think the natural first sort of wave of customers are going to be those who have tried Visium before and now can kind of contemplate new projects were converting their experiments to HD. Going forward, though, we do expect there's going to be material numbers of new customers that have been on the sidelines before.

And maybe 1 more on that. So the new customers -- it was like anyone who opted Xenium because it wasn't like whole [ transshipment down ] or they didn't want to adopt Xenium because it's too expensive and kind of Visium, which was a high resolution, like who is that customer that wasn't doing Visium that will do Visium HD wasn't doing Xenium, that will do Visium HD.

So the customers that weren't doing Visium before, I mean, there's a whole set of them, people who were maybe sort of used to working with tissue, but they are used to like the low plus kind of level and they're used to seeing much higher resolution than standard Visium was allowing for, potentially people who were more in the genomics world that wanted to get into these spaces, but kind of either low resolution or low plugs was too limiting for them. So I think it is kind of across the board. People who are looking who are running single cell experiments and want to also now do Spatial components to them, they're very natural to be waiting for these technologies for Visium HD to deliver high resolution or for Xenium to deliver maybe higher plug levels.

Okay. Maybe kind of looking at the guidance, 8% to 12% growth. We kind of -- we have 4% on the single-cell side, a much higher level on the spatial side. I'm just trying to think through -- I think you do 2% in 2023. You said at the beginning, like the motivation to really set the right incentives for your salesforce now to kind of maybe shift a higher priority on single cell, you have GEM-X. Any color like comes up a lot. I'm sure -- in kind of conversations that you have with investors. But what do you think the market is [indiscernible]? And do you think 4% is a reasonable ZIP code for '24? Or could you do better? Just kind of how do we think about that?

Well, so first of all, like our underlying contention around single cell is that this is still like really, really early. Ultimately, we see that all tissues, all cells need to be analyzed with single cell context. This is where the biology is like not having that context, you're sort of undermining much of your -- much of the point of view measurement. So we do know that the world needs to get there. It's -- we've also long believed that it's not going to be necessarily a consistently monetizing client, right? You're going to reach various inflection points along the way. Well, some of them are due to just sort of our internal focus on where are we going to be putting resources, some of it having to do with market dynamics. We do think that in the long run, there is lots of lots -- many, many years of robust growth for single cell going forward. Certainly, commercial focus is part of it for us to drive that. Some of it is going to be driven by price. We see single cell being a routine part of our 1 dose biology at multiple thousands of dollars per sample, it can't be that, right? So over time, we certainly see is driving down the price point as being critical to kind of expanding the market and driving to those system demand. And our launch of GEM-X is 1 step in that direction. There is a lot more that we have planned. What we have done with Flex assay, which allows you to multiplex at high levels. So that's official multiplex, you get down to really, really nice price points as well is another kind of vector along this direction. We're also going to be driving towards greater just ease of use, which becomes more important over time as you can enter a larger customer segments. So I think it's 1 of those things where it's not always going to be sort of smooth and monotonic. But the fact that sort of the recent growth has been less than what we would have, one, it doesn't indicate that there is not going to be a more rapid growth going forward.

And do you think on the growth be kind of below kind of where you think the natural rate is for 10x. Was that -- I mean, was competition kind of having some success there? Was it a big part of China, Spatial cannibalization? Like, I guess, a long way of saying, what do you think the market was growing at in the last few years while you were growing kind of low single digits.

So if you look at the last few years, so certainly geography is a big part of it. And China, it's -- I don't think it would be appropriate to look at the full kind of market without breaking out by geography. Certainly, we had kind of the first store effect, I would say, was China. When you peel apart sort of other regions, there's more robust growth, market system. It's not as high as we would have wanted. I think when we look at last year, certainly, our focus and kind of the focus of the company and focus on commercial execution has been -- and also much in Chromium has been in other places, and I would place that as the first order variable. There has been an increase in competition over the last year. So there's always been some competition in single cell. It's a big market. It's an attractive market. Companies have been trying to enter this -- the market more so, there's sort of more prevalence of these -- of smaller-scale competitors that are out there now. They're having some effect. It's -- the dynamic is largely similar to what's been there before, where customers trial them. They use them by and large those customers come back to us because of the advances in data quality, advantages of workflow, a breadth of applications, customer support, but it does create some amount of fraction. And -- but I wouldn't call it as the kind of the primary driver.

Pharma has not been a big user as far as we can tell. Flex, we thought might have unlocked it. I think when you launched flex few years ago, similarly, you thought maybe that would be in the mark -- what's been the impact in pharma for single cell? Is that a big opportunity? Or is that something that is nice to have, but isn't necessarily going to be a big driver?

No, we've long believed that there is a big opportunity in a single cell in pharma. We've done okay in terms of early discovery kind of being -- putting ourselves there. I think there's a much larger opportunity going forward to unlock the opportunity where we said along, you do need to kind of mature your product set, especially for it to work with the fixed samples and be able to -- for fixation to enable distributed sample connection, to enable kind of larger-scale R&D projects within pharma as well. And it's only over the last couple of years that those -- the product portfolio has matured to the point where we have these capabilities with Flex being the primary example of single cell side. And yes, it hasn't gone -- the Flex hasn't done as well as we might have hoped for, but it has -- it certainly has a lot of potential. We do intend to lean into it a lot. So once you have sort of the product portfolio in place, you also need to evolve your commercial strategies to go after those markets. And we've grown up in sort of the world of academia and we do need to have -- we are making a consolidated effort to focus -- to add additional focus on biopharma customers in terms of specialization, in terms of adding more resources. So I think it's the right time to do this with kind of where the product portfolio is as well. But zooming back out, we strongly believe there's huge potential. There was a recent quote from the CEO of Sanofi, who made the point that something like 90% of their new drugs have single cell -- credentialized by single cell analysis. So that shows you that there is -- even at this early stage when a single cell is still being used fairly sporadic, like it's a really expensive, really sophisticated tools already making a big impact. Our goal now is to grow into routine use, both in Sanofi and also expand that mindset beyond Sanofi into all the other biopharma companies.

So maybe back to the beginning then when we talked about like we're at 4% growth. I don't know, is there like -- I mean, have you seen where the street lined up? Is that a reasonable spot you think for single cell? And then b, it sounds like you remain very confident about the future opportunity in single cell. I mean, would you characterize it as a 10% growth market opportunity, 5%? Any color how to think about what the market could grow at over the next period of time.

As far as the growth rates go, maybe I'll start there. And even going back to what Serge was talking about this past year, about there just being a disparity between the results by region. And so when you look at AMR and EMEA, Chromium consumables for those 2 regions together grew over 10% last year, over 2022. We've talked about the challenges that we've had in China. But then think about this year with the product transitions and rolling out the update on GEM-X on our 2 flagship single-cell products with a 10% price decrease. And then also predicting the franchise to still continue to grow overall, even going through that kind of transition this year. So I think it is important to level set and put it in the context of those transitions that we're going through with that price decrease.

So it's the idea like aluminum launch is a new sequencer and usually maybe end of year 1 or end of year 2, the pull-through happens. Is that kind of implying maybe with the GEM-X, like there's some transition, but exiting '24 and to '25, you would see maybe stronger single cell growth because of the transition?

Yes. It's like ultimately, we believe that elasticity is there, like we're firm on that. I think there's -- maybe a question as far as how soon it will kick in and what we'll see in the near term versus over the course of the year. And we think with this kind of transition, we do think there's going to be initial kind of bump, but then a more gradual transition throughout the rest of the year and have probably most customers on the platform by the end of the year, like new customers coming on. We should definitely go with the new product. Customers that have studies that are in work, it might take them longer to transition to complete what they're working on before they switch platforms. But yes, I think it will take some time.

We can come back maybe at the end. So Spatial, we have low 30s growth in '24, that blends up to kind of the midpoint of your guidance. Maybe 1 thing on Xenium first, right? I think you placed 247 boxes in 2023, we have to place them around the same number, a little bit higher in 2024. Justin, you talked about a bit of a pull forward that occurred. Just kind of give us a sense on, but then you've got NanoString really distort 1, I would say, distribute certainly with the bankruptcy. So just any color about how should we be thinking about the '24 outlook for Xenium given some of these factors?

Yes. So a few things. This is an expensive product. A large amount of CapEx dollars go towards this. The larger the CapEx spend, typically, the longer the cycle. So we're seeing about a 6-month sales cycle on average, some longer, some shorter. I talked about the dynamics on the pull-through before. Just to summarize that, we did a price increase at the end of Q3, and then we had the year-end budget dynamics at the end of Q4. So we think we pulled forward probably 1.5 quarters of demand from the beginning of this year into Q3 and Q4. Q3 and Q4 placed about 180 instruments in total across those 2 quarters. And so when you combine all of those things, it points to a lower Q1 sequentially coming on from Q4. And with visibility as far as what we expect to close maybe over the next 6 months. But we do see a broad set of opportunities in the funnel. So it's going to be a matter of getting those into that like 6 months until closing cycle and just accelerating them from there. We did say that -- from what we can tell right now, probably 50 to 75 units per quarter is probably how to think about this in the near term, starting off at the low end of that for Q1 and then gradually ramping throughout the rest of the year.

So do you think ultimately, like the institutes boxes will be kind of concentrated and a number of labs, but maybe it's, I don't know, 1,500 boxes placed in like 4 years around the world across yourselves and the other competitors. Or could this become a much more ubiquitous decentralized, like this goes to something more like mid-throughput sequencing where you can really see proliferation of placements given the utility of the technology.

Yes. I mean my view is it's going to be -- it's not like a Chromium box, right, which can be like [indiscernible] benched up ultimately. It's also not like sort of a NovaSeq. I think there's -- I think, mid-throughput sequencing kind of as a nice benchmark to think about. I think certainly, there's a huge number of core labs that will be very -- like they are, and we'll be very interested in Xenium and potentially multiple Xenium. I think there's also quite a large number of individual labs that are buying it now that we anticipate to keep buying it. It is hefty for an individual lab, it's a hefty price tag, so that will take somewhat longer. But yes, we do think there is a very large potential for placements, materially more centralized than Chromium, but nevertheless, quite wide.

Have you guys seen pressure from like the continuing resolution and like AcademicLabs in the U.S.?

Yes, we've heard chatter about that coming from the field.

Is there anything baked in for the guidance on maybe a little bit more tempered spending there or not really?

Haven't talked about it that granular. But typically, there is -- that's why there's a range.

Makes sense. And NanoString we're going to speak on our panel coming up, there's 1 customer who still uses NanoString, he's at 1 of the core labs, he's a technologist, he's like, like to get in the weeds, he's fine, he really bought it. But I'm just wondering, I would think a lot of customers who may be placed an order would be looking at it and say, it makes a perfect time to kind of switch to 10x. And I think you guys have noted that you've kind of had some policies in place to try to attract some kind of capture from the NanoString funnel. Just what can you say so far you've had success with and maybe what do you assume for 2024?

Maybe I'll start. I mean so -- I think the largest kind of -- the first store dynamic really is the performance of the system. And that's what we drive and that's what we'll lead with. I think that has been maybe the biggest sort of change in -- when we look at like what happened in Q3 and Q4 of last year, like is a big as the Xenium is like performing really, really, really well and well above competing platforms. And I think that's where we are leading with and that's what's resonating with customers. Yes, there are some customers that might continue to use [ COSMIC ], but along any number of direction dimensions in Xenium is just a superior platform. And it's only getting better with all the launches and all the new capabilities that we're adding. That's what we're focused on. There has been obviously a lot of sort of developments with NanoString, the litigation and such. We -- but again, I think the focus is on the platform. I think that's what's really leading the success of Xenium in the field.

And what was your thought kind of on the reversal of the case in Europe that the fact that they had that overturned. And I think during bankruptcy, the injunction kind of gets waived right now, so they could be selling, but -- is there any ramifications you guys think for that decision in Europe to kind of flow back into the cases in the U.S.?

Yes. Just to kind of -- on that point, I mean, it's a small point. It's a reversal of preliminary injunction, which doesn't -- there's still the main action and a pretty high bar for a preliminary injunction in the first place. So it's a fairly small ruling relative to -- also all the rulings that have happened, and they're coming up. We still feel very confident in the validity of these patents and in the infringement there. So when it comes to the main action, yes, for sure, we feel very confident, and there's a lot of precedent behind that. As far as what the effect the bankruptcy is going to have on these proceedings, that's a little bit hard to say right now, right? That's all those things are somewhat in dispute. As far as the effect on a U.S. case, no, I mean, there's no effect, those are different cases, and we feel very strongly about those.

And then maybe how much some of the announcements at AGBT at Singular with the G4X and Illumina has made some comments who knows, but I mean they've alluded to maybe something in Spatial, but we'll have to wait and see just -- I guess the answer is you probably always welcome competition, but were you kind of -- some of the features that G4X offered look pretty interesting. Just kind of wondering what you think of the competitive landscape from some of the new news.

Yes. Look, we always talk about this being a very attractive market, very large, and it's only been validated what's been happening in the field. So not surprising that other companies will start thinking about it and start trying to move in. It's hard to comment on specifics of what Singular might have announced or others without seeing kind of the full details of the product and the specs, especially since it's still kind of aspirational, still in the future. We take all competition seriously. And certainly we contemplate all the different ways that this kind of data, this kind of technology can be achieved. We've talked all along about 1 of the things that excites us about Xenium is just the tremendous amount of headroom that it has. And our focus is to keep innovating, to keep investing in the platform. And so we've talked about all the features we have coming this year. There's a lot more in the works beyond that in terms of new capabilities, more throughput, more lower cost. And so we feel confident in our position and it focuses on innovation and serving customers really, really well, and feel like that gives us -- that puts us in a really strong position to compete against anyone who would choose to come in this space.

And when you think about the cadence on new innovation, you just rolled out these 2 really important products here. Is it kind of annually there could be -- I mean, is that typically what we expect? Because you've talked several times during this 28-minute discussion about new innovation, new stuff, more things in the hopper. Is that like next year, maybe the year after that, we continue to see a kind of a steady pace of things or...

Well, I mean, you can look at us kind of historically what we have done, and we've been pretty continuously innovating in all 3 platforms. The last few years, in particular, kind of standing up Xenium, which is a really complex really sophisticated one, while also launching new products on other platforms. That's been somewhat of a challenge. I think that we -- again, like I said, we have a lot more in the works. And I think looking back at our history is a good indicator of what's coming going forward.

I want to get a question on profitability, but maybe I'll do that. So Justin, you generated free cash in the fourth quarter, kind of what are the expectations for free cash flow generation in 2024? And do you expect to be free cash flow positive for the year? And kind of how do you balance that versus the investments to support the business?

Really proud of the team that we were able to hit that goal at the -- in this past quarter. That was a goal that we put out 1.5 years prior, and it took a lot of hard work by the team to get to that point. As far as thinking about 2024, all of the effort that we put into controlling costs has paid off. We've got the optionality right now to choose where we target investments to continue to drive growth in the business. And we've got a great setup for 2024. For Q1, we don't expect free cash flow positivity to repeat there. That's in part due to seasonality but also due to the milestone payment that we made for the asset acquisition in the beginning of January as well. But all in all, it's just -- it's a great position to be in that we can drive those positive operating cash flows and choose where we invest them back into the business while not burning large amounts of cash.

So Serge, I think investors have a pretty good handle on 10x and what you're doing, but there's a lot of moving pieces to the story, too, right? So what do you think people maybe don't really appreciate that story?

Maybe I kind of -- what I referred to earlier, like it helps to zoom out because there are a lot of moving pieces any given quarter, any given year. And when you zoom out and you think about like, okay, how do we -- how are we actually going to consult biology, how should biology be done? It's like unambiguous that it needs to be measured with single cell contacts with spatial contacts were appropriate. So once you kind of accept that premise, and I don't think anyone really can argue with that premise. You have to see the opportunity here is enormous as big as anything in life sciences, just looking at our 3 platforms. And we're as well positioned as anyone can be in order to take advantage of those opportunities. So I think those are the -- that's a really critical conceptual point that sometimes gets missed when people focus on sort of the puts and takes of any given quarter. And again, this path is not necessarily going to be always monotonic. But ultimately, we have many, many years of robust strong growth ahead because the opportunity is so large.

Great. I think with that, we're out of time. So thank you guys for being here. Thanks, everyone, in the audience.

Thank you.