Oxford Nanopore Technologies plc (ONT) Earnings Call Transcript & Summary

Hey, everyone. Good afternoon. My name is Tejas Savant, I'm the life science tools and diagnostics analyst here at Morgan Stanley. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out your sales rep. It's my pleasure this afternoon to host Oxford Nanopore. And from the company, we have: Gordon Sanghera, CEO. I know Gordon, you want to make some opening remarks and introduce all the shiny toys you've brought with you. So take it away, and then we'll get into Q&A.

Thanks, Tejas, and good afternoon, everybody. I might be the last person between you and the drink, this evening. Hopefully, we can entertain you -- I have here some toys indeed, have some sequences actually, nanopore sequences. And I'll start with the MinION, which Oxford Nanopore was formed in 2005 and was launched 10 years later. And it is a small portable sequencer that plugs into the laptop, the business model is consumable sales, there is a flow cell and the kit. Coupled to that, we can either plug it into a laptop or we can make a completely portable integrated version. So this is basically an NVIDIA compute, an iPhone screen and a MinION flow cell here. Last year, 9 months ago, we launched this. This is a 2-channel PromethION sequencer, and it has the flow cell in here, it's 6x -- sorry, yes, 6x the density of electronic channels, and therefore, the throughput compared to the MinION and it simply leverages Moore's law to be able to give you that increased throughput without an increasing cost of goods. These are all electronic sensing devices, not optical. And for each of them, we basically have 3 customer types. So our smallest group, are genomic entrepreneurs and explorers and up to $25,000 per annum, median about $6,000. These people are using nanopore, where we read native DNA to rewrite the rules of biology because when we look at native DNA rather than sequencing by synthesis, we see the full biology that genome in high definition and full color. Our second group are MinION and GridION users who -- typically a GridION, a GridION is 5 MinIONs in a box. And so, they tend to be medium-scale users, $25,000 to $250,000 with a medium spend around $60,000. Public health laboratories are more mid-range, mid-scale programs, panels and so on. The third group are our super users. They have multiple devices, and they either have a P24 which is a 24-channel version of this; or a P48, which is a 48 channel version of this. And they spend greater than $250,000 and typically 600,000. So we have 6,000 or 7,000 genomic explorers, over 1,000 customers who are in the midrange and about 90 multi-device P24, P48 customers. In each case, the commercial model is to sell these as bundled OpEx. So, the device is free. But our cost of sequencing is comparable in cost per gigabyte across the segments, whether we're going head-to-head against NextSeq to MiSeq or at the top end NovaSeq, but without that upfront CapEx. We can read native DNA of any fragment length from very short, which is really interesting in liquid biopsy space, to long tens of thousand bases to ultra-long hundreds and thousands of bases. So it's a technology that can do long, medium and ultra-long read with native DNA, these are all highly differentiated. One final thing. This is real-time live streaming, and it's not batch-based. So you don't have to maximally load this machine. You can put on one sample on a P48, or you can run 48 samples. Your volume-based discounting will give you the same cost per genome. With that, I'll hand over to your questions, [ right ] Tejas.

So Gordon, it's been quite a journey for Oxford Nanopore over the past decade or so, really. And it's -- I've seen it sort of evolve from being viewed as fun, hit, cool, but ultimately niche in slightly unpredictable platform to one which has really sort of matured now and come into its own, right? And then part of that has been improved accuracy and we'll get to that in a minute. But it will be great to just get a high-level overview of what's gone well for you over the past sort of few years? And where perhaps you could have done things a little bit differently in retrospect?

Sure. So I think with such a different offering to sequencing by synthesis, it's not just a small step. It is really a big disruptive step. And we chose to launch the MinION, the $6,000 starter pack to get technologists, customers to prove out 2 things. The value proposition that distributed benchtop students running simple sequencing devices was something that was of interest commercially. And secondly, to really drive technology validation. And that has led to over 8,000 publications extolling the virtues of native, long DNA. So, in the last 2 to 3 years, there has been an exponential growth. I mean, the pandemic resulted in public health laboratories having to sequence COVID variants. And the GridION, 5 MinIONs in the box really drove adoption of nanopore sequencing in low and middle income countries. So we sequenced over 2 million COVID genomes. At the start of the pandemic, we shipped 200 MinIONs to Wuhan. And today, the Chinese CDC have this as their surveillance monitoring for next pandemic. So things have gone okay in that period. What was challenging was scaling and getting that reproducibility and always driving accuracy to reach Illumina standards, the gold standard of it, [ is for now ]. So that we have managed to achieve. March last year, we launched our Q20+ chemistry. The reliability and the consistency across all of our platforms is here now. So we are -- yes, we are growing up and becoming a mature company.

Got it. Yes, that's actually a perfect segue into my next question. Can you walk us through what you've changed to overcome some of the earlier issues you saw in systematic buyers, et cetera. You've got the new chemistry, obviously, but there's also other stuff that you've done to address some of those challenges. Just walk us through that.

So the -- let's deal with the systematic buyers. There is -- with nanopore sequencing homopolymers -- and today, that is now down to a very small range of homopolymers, greater than 10 bases, 10 to 12 bases. We still face a little bit of a challenge. But in the context, for example, of human genomes, they are in non-coding regions. So we have now pretty much removed systematic bias driven by homopolymers. In bacterial genomes, there are very few genomes with greater than 10 homopolymers. So it's kind of gone. But we have some polishing steps that we will introduce that will completely remove that. So we are substantially equivalent on accuracy with [ snips ] and variant calling. It's been driven by improvements to the nanopore, so that increases a signal to noise. Quieter electronic motherboards, so the electronic noise is lower, but most significantly, Machine Learning/AI, the exponential rate at which we're seeing that technology progress, we can just leverage on the back of that and take those improvements and port them over. And that has been the significant driver in getting our accuracy to what we call the Q20+ chemistry, which we launched last March.

Got it. And what's been the early user feedback on the new Duplex chemistry? And what is the accuracy that customers have been able to consistently achieve in their own labs?

So before we talk about Duplex chemistry, I'd just like to talk about the Q20+ simplex.

Sorry, right.

So today, we did this rollout in a very controlled and limited manner, probably the most mature rollout of the product, very similar to my old company, but very careful about how we put it out there. It's widely adopted now. In the context of a human genome, you can get Q47 accuracy. On the bacterial genomes is greater than Q55. So customers are replicating on Simplex, that same accuracy. Now Duplex, for those of you who don't know, the first strand is followed into the [ pool ] by the second strand. So it's pairing. So we can take both in majority call, and that gives you Q30 single-pass accuracy. Now that chemistry is really important for de novo sequencing and for creating Telomere-to-Telomere reference genomes. And whilst a year ago, it took Nanopore, Illumina, BioNano Genomics and PacBio to sequence a Telomere-to-Telomere genome. A year later, and that costs about $25,000 that was done by [ laboratory ] Karen Miga, University Santa Cruz and Nature publish it as the Method of the Year, long reads. Today, you can do a Telomere-to-Telomere with Nanopore only using long and ultralong for a tenth of that price, and that gives you the most comprehensive human genome reference that's out there today.

Got it. On the last earnings call, you talked about the importance of the A Series compute upgrade that you're rolling out on the PromethION. I think you talked about a 4.5 increase in base calling speed. But what does that translate into for the average user in terms of just cheaper fully-loaded cost per genome?

Sure. So the A Series upgrade enables us with the launch of our methylation basecalling software Dorado, which is integrated into our operating system MinKNOW to be able to do real-time methylation as well as whole genomes, and that's really important because customers really want to see that 95%, 96% of the methylome that we can map. And this is not an additional run step of several hundred dollars to do bisulfite sequencing. So that really brings all that together. And also that compute power allows us to go through complex, more complex and machine learning models to deconvolute and push the accuracy envelope as well. So those are both significant drivers in commercial adoption.

Got it. Can you talk a little bit about where you are in upgrading your customers to the A Series? And what are the implications of that for instrument margins? And how does the product sort of stack up versus [ ragging on board ] from Illumina or some of the other solutions out there?

So because it's a very apples-to-oranges comparison, but because our data streams live in real time, the upgrade to the A100 series and that much, much bigger compute capacity for us to have more complex machine learning, signal processing algorithms. It's a no-brainer for us to take a short-term margin hit to upgrade our customers because we are very confident that it will grow consumable adoption. And as we look, particularly on the Parmesan PromethION fleet at Q20+ chemistry, we're now at 90% adoption of the Q20+ chemistry. On MinION, it's about 50%, but that's because the 9 series chemistry accuracy is sufficient, though accuracy is not a binary there's a continuum. And also, there's a lot of legacy projects that people are finishing. So in the next 6 months, we will completely switch out the 9 series to the 10 series. So the short-term hit on margins will pay in spades in the medium term with consumable pull-through. And on that point, 75% of our revenues are consumables.

Got it. Two other things I want to hit on before we move to the product portfolio side of things, Short Fragment Mode, what is uptake being like on that front? And in terms of Adaptive Sampling, what types of applications do you think this could be suitable for? And can you comment on some of the traction you're seeing for that to date?

So, Short Fragment Mode, it's really exciting. We can -- we've always been able to read short stranded DNA, but our focus was to produce a highly differentiated unmet need in the long-read space. But we have turned our attention to short fragment mode, and we launched the product about 18 months ago. And the first thing that's really interesting and significant because we're looking at native DNA, and we can read any read length, so whatever is in this sample because they're not cutting it down to 200 base pairs, circulating tumor DNA can be as long as 3,000 bases. So that's a bit of a shock for everybody. But more importantly, and this is some great work I've done by [ Hanley ] at Stanford, he looked at colorectal cancer patients and controls. Those short fragments on the cancer patients had 7% methylation, the controls had 2%. And then he had some longitudinal samples where he showed treatment efficacy and the 7% methylation dropped to 2%. But then as the treatment -- the patient became resistant to treatment, it goes back up to 7%. So I think that's really exciting. We also are the only company that can read RNA directly. So not CDNA. And so there are CDNA needs certain parts of RNA unread, dark RNA and is a publication from the University of California, Santa Cruz, where they're looking at this dark RNA as a predictor for cancer in liquid biopsy. So, I think that space is really going to be interesting, but we are at the very -- in the foothills of that journey, and it's the really discovery phase that we're in. But I do think it will be exciting to be looking at native DNA and modifications in liquid biopsy applications.

Got it. Following the launch of the Q20 chemistry and the R10.4, are you starting to see that inflection in the installed base for the PromethION and the GridION?

So it's interesting, I mentioned that, particularly in the S3 customer base, the PromethION P24 P48, in that grouping, they are rapidly adopting. It's not surprising. They are the most sophisticated and they're doing the highest -- hardest biology. And so yes, and we do think that some we posted for half 1, 47% underlying growth by stripping out our Emirati Genome Program and COVID. And that, we think, is a big chunk of that is driven by PromethION cells, PromethION flow cells and driven by that Q20+ chemistry and the upgrades to the platform as well.

Got it. What's the latest on VolTRAX, the automated library prep solution. What percent of your GridION and PromethION users are leveraging that for library prep?

So, VolTRAX has been an interesting project for us. It was a collaboration with Sharp Life Sciences. About 18 months ago, we acquired the asset, and we pretty much put on hold what we were doing with Sharp. We are completely revamping the offering on VolTRAX. We have a few legacy customers we can support, but it really is a project that is back in development, and you'll hear more about how we are reconfiguring it and refactoring it. That is in development, not in production.

Got it. And do you view that as an important solution to offer to your customers that could really accelerate adoption?

So when we think about crossing the chasm to the applied market, I think automated sample prep solutions will be central whether that's -- and we announced a collaboration with Tecan on our automated liquid handling sort of classical robotics or very miniaturized for decentralized point-of-care setting, which is where VolTRAX will say, we do think they will be central in moving sequencing from centralized specialist multimillion dollar facilities into broader application in the decentralized settings.

Got it. You talked about 500 customers with 20% new accounts for the P2. Where are you seeing the strongest uptake? And as you think about your portfolio, where is this fit into the much larger PromethIONs?

I don't know. This is an interesting beast. It's kind of a [ few use ] computer vernacular. It's a supercomputer in the hands of really creative people. So it will be interesting to see where it lands. In terms of the 500 placements in the first 9 months, it's across the S1, S2 and S3 customer base.

And was that surprising to you, Gordon?

I think when we asked what would you do with the 2 channels, we were surprised that the S1 customers were interested. So I think the MinION comes under $1,000. This is $10,000 pack. I don't know what the ceiling is for entering the game and maybe it's 20,000, 30,000. So this will drive sales over there. But of the 500, it's too early to see exactly where they are and what they're doing, but what is significant and interesting. If you run this at full fill, it can do $170,000 in consumable pull-through per annum. And we've actually got a few outliers. I don't want to mislead anybody here who are actually running these at full fill based on utilization. I think it will come in somewhere more like the S2 customer grouping around 1/3 of that, $60,000. But that -- I think the thing that happens with this is you can really start to do some chunky and complex biology, which allows you to make small data sets that allows you to get bigger grants. That's how we've seen MinION progress, and this is just a super version of that. And I think that can then really lead to an accelerator of P24, P48, but not necessarily because you can daisy chain a handful of these and run off those as well.

Got it. So just to make it more real, what will this translate into in terms of throughput or samples for, let's say, a targeted sequencing panel or something like that?

So let's be a human Yes, because that's the answer over here. So, on a P24 -- or just P48 because don't know the answer to that one. P48 is 10,000 per annum -- so you can divide that by albeit 24 [indiscernible], but we have a road map that allows us to go from one genome per flow cell. It's actually 1.5 you can get at the moment. You can do 1.5, but 1 to 2, which means you get to 20,000 genomes per annum on a PromethION 48; 10,000 on a P24 and then a few on there. And that road map then leads us to 3 genomes, so we have a pipeline. So we are increasing that scalability and throughput at a dramatic rate, and we will continue to do so. And that's where the focus lies now that we have the Q20+ simplex chemistry and the Q30+ for de novo and reference genomes, but the bulk of revenue will come from that simplex, and that's highly competitive in cost of genome as well.

Got it. In the interest of time, I'm going to ask you sort of to pick a favorite among your children. So direct RNA sequencing, the ultra-high throughput PromethION. I think you're doing something with ASIC as well on the lower-cost low-power devices and protein sequencing is something you've talked about. I mean, not so shared any data around yet, but that's in the hopper as well. So which among these do you see as the most near term and needle moving?

So I think the -- well, I love them all, they're all my children. I'll just knock them off in reverse order. Protein sequencing is coming. We're really excited, and we have translocation, and we can measure some of the peptides, not all yet. But the chassis -- so I think, it will be in this beast, the chassis is already built. It really is just changing the operating system, which is the nanopore. Now that we've sold the translocation, it's really the reader head that gets us there. The low-cost ASIC is really exciting. I had come from a point-of-care blood glucose background, we helped to decentralize and democratize blood glucose analysis, the total diabetics at home. I think the low-cost, low-power ASIC allows us to get to single use. And I think that's critically important in industrial applications, whether that's real-time biologics manufacture or some of the clinical applications we're excited about. What was the other ones on your list?

They were basically the direct RNA sequencing that was...

Direct RNA will be a game changer. We are at sort of translocating at 200 bases. Second, that's 5x what we were doing a year ago. And we think that modification paper on liquid biopsy is a great example of how that field will emerge.

And the ultra-high throughput.

Ultra-high throughput, T-to-T, every week, there's a new reference genome. We think that will become the new gold standard, and that's what everybody will be judged against. And this SBS 92% of the genome as a gold reference will become a thing of the past. So that's also important that they're all important. They're all massive drivers in pushing growth through innovation, which is what we're all about.

So on the PromethION today, Gordon, what's the price point like per genome at 30x coverage? And is it this ultra-high throughput offering that gets you to sub-$400 or perhaps even lower?

So 1 Gen today is $690, and we're a few months away from putting 2 genomes on each flow cell. So that gets you 3, 4, 5.

Okay.

And this is 30x simplex, that's all you need. And if I could just comment on just correct some things that may or may not have been said today about storage costs. There is -- you can have raw data, which is the raw signal as we generate it before it is then converted through machine learning/AI into sequence data. So industry standard sequence data [ files are ours] are equivalent, storage cost equivalent. The raw data is a unique feature to Nanopore. And the way to think about that is, the data is not dead on arrival. What I mean by that is for the highly sophisticated users, they can retain that data. And the storage cost is not $600, it's $15 on AWS. And then they can go back and rebase call it with modifications or upgrades or new insights if they wish to. That is a feature for the raw data. I just wanted to clarify that. As we go from $3, $4, $5 on 2 genomes to 3 genomes per flow cell, we get closer to [ 2, 2.50 ]. And we think a fully loaded full methylation, long and ultra long read structural variation, copy number variation and the snips and variants you get with short read that sort of $200 to $300 is a sweet spot for fully loaded genomes that are the gold standard, the new gold standard, and that's where we are selling out our store.

Got it. I'll ask you a sort of 3-parter on the competitive landscape, right? So you've got PacBio, I mean we started shipping the Revio earlier this year. How often do you run into them on RFPs, like particularly for your S3 customer base? Or is it still sort of largely nonoverlapping? And then to the extent that you do -- when you win and when you lose out, what are the sort of customer criteria that sort of work in your favor? And when do they work against you?

So with the RFP overlap, I don't think we see that because of the OpEx model. We're not feeling any pressure. But let me give you 1 or 2 examples of where we are. So we are exclusively in a 4,000 patient trial with NIH on Alzheimer's. They need long reads. It's well understood that long reads and structural variation go hand in glove. They've chosen us because of the throughput and scalability, and they recently published their first data sets showing that they were getting the same structural variation comparable to high flow reads, but in a highly scalable, more cost-effective manner. On the other side of the pond in the U.K., Genomics England have what they call Cancer 2.0, which is to introduce sequencing, human genome sequencing into hospitals, into the NHS to the specialist labs, called the genomic laboratory hubs, the GLHs. And they chose Nanopore over Illumina because the long reads and the native DNA give you the methylation structural variation, which you need for cancer. That is exclusively several thousand patients on Nanopore, and there are multiple opportunities. We focus on ourselves. We focus on the low-hanging fruit where we think we have a unique value proposition because of the native all the long read or the short fragment road native, where we believe that we can provide value, and that's how we focus on getting those opportunities. Q20+ is a big accelerator of those opening those doors and having those conversations.

Got it. Competition for the marginal research dollar, even sort of outside of long reads, there is a focus on spatial genomics or perhaps proteomics, multimodal approaches. How do you think about the -- where in that sort of priority list does long-read sequencing or long-read sequencing your nanopore lie for your customers?

So we are heading to a multi-omic world. Our view is, so we've got SMPs, SMBs, and then we've got structural variation and we've got copy number variation. Those are multi-omic. On top of that, because we can read full RNA transcripts and our sample prep is not 2 days, it's 1.5 hours, and you can get that full transcript. We have a marketing partnership with 10x Genomics. People are -- and it's highly scalable and highly competitive. You get full transcripts at the same number of reasons you get short transcripts. That's really exciting for us. And then the next thing we plan to do, and we are making good progress, but we'll talk about it when we're ready, not before is proteomics. So we believe the nanopore platform will offer that multi-omic play all the way across with no platform shift, all on the same sensing platform and measurement systems. So yes, we're really excited about that whole menu and the offering that we will bring to the table.

Got it. A quick clarification. Direct RNA that's supposed to go live by year-end. Is that still the plan?

No, the direct RNA is out there.

Oh okay.

It's available. I think that the -- where we are on that is it's right at the beginning, people are really trying to understand. There are many, many modifications on RNA. And people are starting to look at direct RNA and get their arms around that. The one exciting thing about direct RNA is it could -- we could play a significant part in vaccine manufacturing where modified RNA is inserted to stabilize the vaccine.

Got it. Last question, I'd be remiss if I let you escape without commenting on China. It's been something that's come up a lot over the last couple of days in terms of just the weakness there on the pharma side, also the anticorruption crackdown. What is your China exposure? And are you running into any of those headwinds in July and August? I know the first half was really good, right? So I think, you called out 20% growth in China.

Yes. So China is about 9% of our total revenues, global revenues. In the first half, we saw -- if you strip out COVID, we had a huge headwind. They were doing a lot of COVID sequencing and they just stopped in January, as we all know. So, our overall growth was greater than 25%. And we're very pleased with that, but we remain cautious -- cautiously optimistic about China.

Got it. And nothing happened since that's changed your mind about business conditions in China?

Not yet.

Okay.

It's rapidly evolving. So we are vigilant about what may happen.

Right. Fair enough.

But at the moment, underlying, we were very pleased to be [ greater than 24 ].

And no signs of economic contagion to Europe, I mean, particularly markets like Germany are export oriented with the sort of...

No, we hired some senior leadership from Illumina to run Europe for us. And actually, we won a long DNA sequencing program in Germany recently. It's hard to get these programs that when you do, they can be game changing. So no, not at all.

Great. That's a great place to leave it at. So, I appreciate the time, Gordon.

Thank you.

Of course.