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

Thanks for joining us today for our second day of the MedTech Conference here in London. My name is Matt Sykes. I'm the life science tools and diagnostics analyst in the U.S. And I have the pleasure of welcoming Oxford Nanopore here today to our conference, Gordon Sanghera, the CEO; and Nick Keher, the CFO. Gordon, Nick, thanks for joining us today.

Thank you.

I thought maybe just to start out for the benefit of the audience, Gordon, if you just kind of give a high-level brief overview of Oxford Nanopore, of the business and just to familiarize people with the story.

Sure. Good morning, everyone. And I guess you've got people online as well, good morning to them. So just to sort of paint a backdrop of what we do and how we are different to other DNA sequences if we consider how sequencing is done in the main today or the current incumbents, it's what I would describe as the equivalent of mainframe computing. So these are large machines that cost anything from $0.25 million up to $1 million, and they're in large, centralized multimillion-dollar infrastructures. These systems, just like mainframe computers, get economies of scale when they're analyzing genetic samples through batching. So they have just like a jumbo jet, you have to completely fill the machine in order to get a cost-effective DNA data point out of it. And they're all optical based, very complex chemistry is involved. And what they do, and if you think about it in the context of human DNA which is 3 billion letters GTAC. They chop the DNA up literally obliterated into miniscule pieces, 200 base pairs long. So that's referred to a short-read sequencing. And then they do a PCR copy, which kind of takes this like full color, high-definition information and turns it into a black and white copy. So it's now been 20 years since the draft genome was done using these methods, referred to a sequencing by synthesis. And we've pretty much milked everything we can in terms of the correlations between diseases and single point mutations. And there are some notable ones like BRCA1, BRCA2 for breast cancer mutations in those genes, but in the main, the panacea that we'd sequence all the genes, and we would pretty much get a really clear understanding and correlation between genetics and disease hasn't played out because it's become clear in the last 20 years, every one of those 3 billion letters is significant and important. But not only that layered on top of that, there are chemical modifications to the C-based GTAC, is referred to as methylation, which is really important in how cancers progress. There are -- if you could have long-reads, which is what Nanopore can do, you see something called structural variation, which is linked to pretty much all neurodegenerative diseases from Alzheimer's to Parkinson's and so on. And then there's one other thing that you get with longer reads, which is copy number variation. It's where you have 15, 10 to 20 repeats of triplets, GTA, GTA, GTA one or two, too many or too few has a severe impact on CNS disorders. So we're starting to with Nanopore sequencing, be able to pick up these other things in biology, and what we do is we take that 3 billion letters, we also chop it up, but the length of the read can be as much as 100,000 basis. So if you think about 3 billion in each left, each piece of the puzzle is 100,000 versus 200. I'm not going to do the math live here, but that's a much fewer number of pieces to puzzle together. And what we've done for 20 years is have what you might describe as a very gappy genome. And therefore, our capability to really drive what was the promise of genomics 20 years has been stymied. Now in the last 10 years, ourselves and the other long-read company have really progressed the value proposition that if you can take these short-reads where they're probably not in the right order and there's gaps, and you can put really long pieces in and fill it in, it really has progressed those areas I talked about. And in fact, 25% of all human disease, that's really tough to get up, as I said, neurogeneration, CNS disorders, developmental delays is all inside what is referred to with short-read sequencing the gap genome, so these gaps that exist. And in the 10 years since Nanopore started sequencing there have been 12,500 publications, and it's become completely clear that long-read really does fill the gaps. And so we're kind of at the next stage of how we do that. So there is a fundamental shift, and Illumina talked about the fifth base and multi-omics. So when people talk about the genome, multi-omics becomes the epigenome, which is your methylation, your structural variant which is these very long inserts, that could be 5,000, 10,000 bases long just in the wrong place, and they can lead to neurological disorders and the couple number of area. On top of that, we're interested in the PromethION. And as we move into the sort of next wave and what the next 10 years will bring in genomics is this multi-omic play. So reading biology in high definition, in full color is something we do. But the platform we do it on has been developed to use electronic measurement methods rather than optical. And so what that means is we can make very small, low-cost sequences. So this is a DNA sequencer, not a mobile phone or a Star Trek tricorder, although it has been deliberately designed to look like one of those. And we have these small decentralized near the origin -- point of origin of DNA. We have medium-sized machines for public health laboratories and large machines population scale and large programs. Because these are electronic, they're very small. There's no optics, no chemistry. We actually just take the native DNA and chop it up into 5,000, 10,000, 100,000 bases and we thread it through a very small aperture called a Nanopore, we get an electronic current as a function of time, we use machine learning AI convert that to real-time in a [ de ] batch way stream DNA RNA information. So the analogy with the computer is the way we went from centralized batch-based mainframes to PCs to handheld and significantly real-time streaming of data, and that data is incredibly rich in content. Those underpin the strategy, the commercial strategy on platforms. So this thing goes out to academics for $1,000. We have our bigger machines, and we have a model where if you don't have large amounts of capital, you're not part of a multimillion dollar infrastructure with big budget. You can use an OpEx model and bundle 12 months of consumables to buy the platform. So now do we have a highly differentiated way of reading the DNA in high-definition, full color, we can do it at the point of origin. We can do it in large centralized facilities. We can fill in all those gaps. And when you combine all of that 2.5 years ago, we reached a chemistry change that brought us the accuracy of short-read sequencing. That was a 6- to 8-year dogfight, if you like, to get to that point. But as with all disruptive technologies, I think mobile phones, I think camera, it has always said that a camera would never be cold out color and then it did, it took 6 to 8 years. So we've been on that journey. And so the last couple of years, we've really focused on the unique value proposition we have, whether it's fast time to resolve, whether it's near patient, another point of origin, whether it's long-reads giving us information that we can't get elsewhere, whether it's methylation for cancer applications, and those have been our target areas, and that's really delivered growth for us in a very challenging market where our peers a bit struggled. It's a bit more than three minutes.

That was great. Thank you very much, Gordon. You recently reported first half results on Tuesday this week and maybe just some of the highlights results and then how you're tracking to the full year guide? And any commentary you can give on sort of the most recent months in terms of end market environment in health.

Yes. So thank you. So for the first half of the year, we delivered underlying growth of 12.4% revenues to GBP 84 million that's against a market backdrop that I think everybody can acknowledge been very tough. Like a lot of the peers have come out with changed guidance, for instance. But we've kept with our full year guide of actually growth of 20% to 30% on an underlying basis, and I'll come back on that a minute. We also reported gross margins of 58.8%, up 120 bps on the year before, in spite of a currency headwind of 120 bps and a mix impact as well. And that's been driven by improvements in manufacturing essentially the flow cells, the consumable items predominantly where we saw a double-digit increase in the PromethION flow cell gross margin. So we're very happy with the numbers that we set out. It's completely in line with the guidance that we set out at the beginning of the year. And what we've kind of seen is increasing utilization. So for the bigger boxes, the PromethION 24s, 48s, we saw utilization of over 20% in those customer segments. So our customers are becoming more established, are starting to use the platform more. And that's for me, for us as a company, that's a great indicator of the KPI for growth. We've also seen our sales infrastructure start to become more established as well. And so for anybody shared, follow the story, the company has been investing heavily for the last two years. It's now -- we've doubled, actually tripled the size of our commercial infrastructure. But the number of heads that we have in the field selling is up 80% versus the same period the year before. Our revenue -- orders per head is only diluted by about 6% now because it was diluted more. And what we've seen is essentially that curve. So we're now seeing sales force efficiency kind of coming to play as well. And that's, again, a great indicator for future growth because if we get back to the same orders per head, we delivered in 2022, then we'll deliver not just this year's numbers, but next year's numbers. So we're starting to see those kind of people come of age. And as we go into the second half of the year, alongside those two key factors, utilization of sales force, placing more boxes becoming more efficient we've also got launches of new devices. So the Q-line is the regulated box that actually is locked down. That's going out to customers, particularly in the biopharma and applied markets where we're seeing a lot of traction, particularly the new content that's come out on devices like the mRNA QC space. So that's another kind of leg of growth that we've seen. And as we've kind of gone around talking to people like it on the Analyst Day as well, we've got good visibility into the second half of the year. So we're confident about that 20% to 30% underlying growth rate. And we're just now wondering where in the range we're kind of going to finish up as we kind of convert more of the opportunity for all that's been growing.

Got it. It's good to hear about visibility. We haven't heard too much about visibility lately in the market. Maybe if you could just kind of characterize the current demand environment across end markets and the customers you serve. Maybe talk about some of the gating factors. I mean funding comes up, IRA impact on the biopharma side. Is there a clear difference between sort of the OpEx and CapEx spend environment for your customers, you clearly play into both. But given your CapEx remodel, I would assume that's obviously underpinning some of the stronger results. But maybe if you could just kind of characterize what the end market looks like today.

I think it helps. But if you look at the life science research tools market in its entirety, is absolutely the last couple of years have seen a slowdown. But in there, there are hotspots, things like single cell and we just announced a deal in Singapore, 10,000 Nanopore genomes for a population scale program. And in particular, Asia Pac is kind of catching up on population scale genomics. So there are hotspots and we very much focus on the unique value proposition we bring. So what we're seeing, if we talk about population scale programs first, we see typically 10% to 20% of the total program is now long-read. Two, three years ago, that was a dogfight, we used dogfight [indiscernible]. It was really difficult to get your foot in the door and have a conversation now it's just become, well, what do we -- who's our vendor for long-read. And so there are growth areas in there. But in addition, because of the unique value proposition we have that capability to stream real-time -- we've got some really interesting -- and the complexity of multiple hard-to-diagnose rare diseases. We're getting business and contracts around screening of rare diseases. We have the population scale, unique value proposition that we bring. And in particular, on that one, we've launched what we call a telomere-to-telomere. So that's talks about a gappy genome, the draft genome has been like that for 20 years with short-read sequencing. This is a comprehensive end-to-end genome. And what is clear in the last 20 years, is this sort of gold standard, which is North American or the European genome is not sufficient as a reference the further away you get from North America or Europe. So the Singapore program will actually create for their four ethnic groups, reference genome. So it's a move towards having local reference genomes fully end-to-end. And that really will catalyze more demand. So we will be able to continue to grow in a difficult microenvironment for funding because it's not great with such low market share we're coming from and the need for fully annotated native DNA long-reads and I think that will continue. And then we've got other target areas in the implied markets that we can talk about later.

Great. And then, Nick, just as you think of sort of the mix of your business, on the revenue side, it's weighted heavily towards consumables, but you also introduced a number of new products that you touched on and Gordon touched on. Could you maybe just talk a little bit about how you expect that mix of instruments versus consumables as you go through the back half, impacting potential margins? And then how that might feed into your long-term guidance as well?

Yes. So we've guided this year to 57% gross margins because we are factoring in a potential mix headwind from more devices going out to a lower margin kind of business for us and also because some of those population scale programs that we're doing, being a per sample basis rather than a -- just a pull-through on the consumable side. So we are guiding to that essentially happening. As we look further out, and we are guiding to over 62% gross margins by 2027, that's going to be driven by higher -- sorry, improvements on the manufacturing side for the PromethION flow cell in particular and a weakening mix profile. Now the thing that we maybe didn't touch on just then is we are already seeing that when we go customers in the applied clinical, but in particular, biopharma space, they want to roll the box. So we're seeing a growing demand for CapEx purchases as well. So we think that will be a trend that will continue over the next three years as biopharma becomes a bigger segment for us overall. What will -- the pricing model will also change because it won't just be a consumable pull through, it will be a per test model. And that's the same for applied in clinical as well, which should be higher margin overall for us. So there are a few kind of factors are coming along, but are going to change it slightly. But I see that 75% consumable mix being a good number to stick with in the medium term. But when we're guiding that 62%, we are assuming it weakens.

And then, Gordon, just kind of going back to the technology. You talk a little bit about the multi-omics opportunity and some competitors in the sequencing space, clearly pivoting towards that opportunities were moving towards omics and proteomics as you kind of move down the chain. How is your approach with native DNA and RNA, giving you an advantage over the longer term as the market kind of shifts? And how do you see your customers using the platform for multi-omics work?

So if you look at short-read sequencing today, you get your single point mutations. If you want to look at methylation, you're going to use a SNP chip, so it's an additional piece of work. And I think what Illumina alluded to was they were going to be able to add methylation to their sequencing on. We've had that from the outset as well as the longer-reads as well. So and I think that is really quite an important point they made because it's clear and the recent was [indiscernible] on publication last week and we've known this for some time now. When you look at the drivers or trying to predict early cancer, methylation is a key here. And there's a stunning piece of work done at some Stamford where they took a series of longitudinal cancer patient samples, and these were circulated tumor DNA for colorectal cancer samples. And what they showed was on the cancer positives that there were the SNPs, the usual things you would find on these short-reads, which we can do, but there is methylation. And the controls had no methylation. So 7% or low methylation versus 2%. And then they had a longitudinal patient that 7% treatment commences, methylation drops to 2% goes into remission, becomes resistant to treatment, goes back up to 7% way before you see any symptoms of resistance. So these are just glimpses of how important methylation and that fifth base is going to be, and that's already built into our sequencing web. We sometimes have an internal joke, we should have said you get a cheap -- buy a methylome, $500 and we'll give you a genome for free. And then the paradigm will shift in that direction. It really will become particularly in cancer, it will be incredibly important. And I think that's going to be sort of when people talk about what's exciting about multi-omics is methylation.

Got it. Nick, you touched on it. This question is for both of you, but just you are rolling out your Q-Line product set for the clinical market. Maybe just give us an update on where we are in that launch? And then how do you see the progression of penetration into the clinical market? A lot of life sciences companies start out in academic, move to biopharma and move to clinical sometimes that shift to clinical ultimately is more challenging than maybe the academic market, but just talk about maybe the Q-Line products and how that can help your penetration, where do you see penetration in the clinical market, either one of you can answer.

So I'll talk about the sort of regulatory side because for my sense when I was part of Abbott diagnostics, I rewrote their regulatory controls many years ago in the different life. So we've seen in the last 2.5 years since we released that chemistry, we've seen a maturity and the customer base is evolving. And what we're seeing now, we still have a burgeoning research market where people are trying to understand the underpinning biology. But we kind of divide the applied markets, they just want to know if it's there, how much is -- have I made the right thing? Is it contaminated or is there this particular aberration that guides me on treatment or diagnosis. So the applied markets they have been asking and that the sort of -- the number of inquiries has grown exponentially since March '22, our chemistry lease and so we have locked in, and we've done it on GridION, which is five MinIONs in one box with an NVIDIA compute, such a soft campaign. It looks and feels like a diagnostic play and that's locked down, and it will be for multiple years as are the flow cells and the chemistries that go in there. And with clinical, it is challenging, which is why we think we will mostly partner hence our partnership with bioMerieux and infectious disease because it is a long and obvious task even just getting RUO-LDT Clearway platforms into market, having a partner in the case bioMerieux and infectious disease is how we think we'll enter markets. But we are seeing an opportunity that's developing a pace and quickly around biopharma, where they also need those regulated tests. And the sort of one that sort of stands at is the fact that not only do we read DNA, we have an RNA sequencing play as well. So it just measuring the direct RNA, not a copy, which means you keep all the modifications on the RNA, which is essentially how mRNA vaccines are designed with those modifications. So we can provide to these RNA discovery people in their research departments direct RNA sequencing. But when they've made that RNA vaccine, they then want to ensure that the modifications are retained in production. So we can also provide bio manufacturing tools as well. So the regulated platform will have these multiple touch points to accelerate our presence in the marketplace and therefore, revenues. And when you couple that with our Tecan collaboration at least see in our automated sample prep that really is an attractive sample to answer workflow for both clinical, which I think will take longer and biopharma, which will come very quickly.

Got it. And maybe just digging a little bit deeper specifically on the go-to-market strategy to clinical -- you can pick your market on the oncology tuberculosis but the clinical market is fairly crowded. You have a novel technology addressing that. So maybe talk about your go-to-market strategy? Is it a lot of education awareness first? Has that path already been laid? Or is it more about kind of getting the commercial team up and running in a more efficiencies.

Nick can do that a bit. So technically, the liquid biopsy plays that are out there. That's a lot of investment in regulation and lobbying of the FDA, and they're in place. And it's hard to shift those, it's just not going to happen. What we think -- so where we're focused is actually on that Stamford piece of work I described and other academics who are really pushing the barrier and looking at native short-read. And on the side, it turns out not all those fragments are short, they can be 800 and 1,600 bases long so the size of the fragments is important. But looking at the methylation on top of the single point mutations, and that's where we are looking at the sort of medium term to be able to enter the oncology space, particularly liquid biopsy. Having said that, tumor profiling through methylation is something that is well established and there is a really interesting screening tool end-to-end workflow developed in Leiden in the University of Nottingham for looking at real-time interoperative tumor classification through methylation and brain surgery in children. This doesn't get like better than that and so that tumor profiling using methylation, I think, is something that might become a screening tool quite quickly. It is in children, but I think it will go broader cancer such as sarcoma. So I think there's a few interesting screening areas where methylation will arise but I think the longer-term liquid biopsy opportunity will be a few years away.

Yes. Just to add to it, we have got over 30 partnerships as well with companies that are looking to utilize our technology and a lot of them are in the clinical space as well. So we've got people who are running -- creating their own workflows and content to run our devices and we're very hopeful for some of those coming. But clearly, the bioMerieux piece, we've got the tuberculosis test in the scenario of product in the second half. And then there'll be two further tests that we're working with them as well from the clinical perspective that will come behind those which would be larger revenue drivers as well. In terms of the sales teams, we're already having those discussions. We've got like strategic BD that kind of work for those sort of partnership opportunities, but with also different types of clinical opportunities like the partnership that we have with bioMerieux. And then we've got the sales forces on the ground who are all used to selling into those kind of markets as well. So we can kind of hand off the opportunities as soon as the content is ready, the workflow is ready. We can kind of get it into those teams and they can start selling it to their network as well.

Got it. If we just shift to China, which has been a popular topic lately, just in regards to the proposed stimulus, which should benefit through the academic research institutions. How would you characterize the opportunity for Oxford Nanopore in the near to medium term, just given the challenges we've seen in the region? I mean a lot of the comments around stimulus have been create a lot of friction this year and delay is trying to figure out the program and what to do. But maybe just talk about in the context of Oxford.

Yes. So it's difficult to kind of get read. We've seen an increase in difficulties of trying to get product into the market as a whole because we're seeing more and more rejections to kind of -- you need a license to export. And we are seeing that kind of as a growing trend and we're having to appeal a lot more of these things, even though for like kids hospitals and things like that. That said, we still grew underlying 7.5%, but that's including a currency headwind of around 10%. So China in the first half of the year was a good double-digit underlying growth driver for us. And that's because we're seeing increasing utilization by customers who are in the market and it's inverted for us when we think about China. Actually, there's a lot of commercial services providers, a lot of clinical customers in China who've already adopted the product because they can see what it could do. So it's a different type of customer group, almost to the rest of the world that we have. So we've got the combined unit now. So the NVIDIA computers with the larger devices, we can export the country. But that's not to say that it's an easy sell. So we've had one item, for instance, had a 15-month review period, a multimillion dollar order that's now coming through. That's the kind of challenge that we're having in the market. So I wouldn't anticipate it being going back to kind of the 30%, 40% kind of growth rate for us. But because of that increasing utilization, so it's just consumable, the flow cell go again, we can still be okay for a growth perspective.

Got it. And maybe from an instrument placement perspective, maybe just some high-level expectations for PromethION and GridION throughout the rest of the year. Just given the instruments remain challenged across life science tools like year-to-date, how much does your CapEx remodel resonate in today's environment as you kind of pick apart the different instrument categories you have?

Yes. It's definitely beneficial for the research market in particular. So the P24, P48, we've delivered -- we're seeing growth in placements in Q2 and Q1. And I think it is a benefit of the fact that we can actually provide the device as a lease option, minimal cost and essentially, they can just buy the consumable piece. GridION around 50% of the sales are CapEx and that's because they go through distributors as well. And then for the P2, we're seeing about 30% of the sales to June, this is for CapEx as well. So the model is evolving, and it's more because of the customers who are now buying the product, want the device. So we are seeing that kind of shift, and we're not pushing the shift. It's just naturally happening. So I think it has been beneficial for us to be able to grow the market. Fundamentally, as you can see the size of the device, it's portable, take anywhere, but it's also a lot more cost effective than the competitor devices as well.

Got it. And maybe just, Gordon, you touched on it with the Singapore National Precision Medicine program, and you also announced one with Plasmidsaurus. Could you maybe talk about some of these large program wins and what the funnel looks like for these large-scale customers and I know that PacBio also announced a program with Singapore on the same program, maybe you kind of differentiate what you're doing versus what they're doing? And how do you see the competitive landscape for these types of large-scale programs moving forward and how Oxford is positioned for them?

So I don't know. They didn't say how many genomes they were doing as far as I understand the pipeline. But from our perspective, and I talked about in our results discussion, not only do we give you native and long. But we also have a road map for scalability. So today, on the PromethION, we have one genome per flow cell that puts you in the $600 to $700 before scale discounts come in. And if you look at the basic genome, they can be $100 to $200 [indiscernible] you've got all those bits missing. We expect in the next -- in the medium term to get to two gnome per flow cell. So you're getting into the $300 to $400 for a full genome. And we believe that gap $200 to $400 is enough, and we will provide that premium product. And Illumina did talk about premium genomes at a higher price. And as we bring that in, and we can scale and we have a road map to get to three and then ultimately four genomes. But it's our scalability. You do not bank $0.5 million machine with large centralized infrastructure. You can have a small room, and you can put in three or four PromethIONs and do several thousand gnomes a week. So that scalability is also important for these large-scale programs, and I think all of those together and then adding in the icing on the cake, which is our telomere-to-telomere workflow with four PromethION flow cells. I think that is our offering, and that's what we're focused on. And we think we tick all the requirements because it's not just an accurate long-read genome that you need, it needs to be scalable. It needs to be easy to use and the fully annotated telomere-to-telomere will become a very important piece of the conversation and sell for us and open doors for us that probably haven't opened yet.

Just to add one piece to Plasmidsaurus because I think that's an important one. That's in the applied market for us. They're a service provider, upstart company essentially that's doing plasmid sequencing. Now the interesting thing there for us is plasmid sequencing is $1 billion -- $1.5 billion market opportunity, and it's done on Sanger sequencing. So this isn't where Illumina or PacBio play or anybody else. This is where Sanger is and is an older technology. But for us, we can do it cheaper, quicker and more accurately. And essentially, that's why Plasmidsaurus have been able to take quite a bit of share in the U.S. and are now growing externally to Europe and APAC as well. We've got a facility in [indiscernible]. So we're now seeing other service providers come to us and adopt that same workflow. We're not exclusive. And I think that's a good growth driver for us that is kind of white space not in the usual kind of thought of sequencing market as well, where we can essentially grow quite quickly and take a lot of share there as well.

Got it. And just to kind of close out. One debate that's been going on for a while is the opportunity for long-read to potentially take share from short-read. You talked about the accuracy improvements, the cost profile, which is coming down closer to where short-read is. The information content in long read clearly is superior, certainly for certain areas like rare disease and elements of oncology. Could you maybe talk about just within your long-term guide in terms of growth, how much of that assumption is taking share from short-read or is that not really part of the assumption and that's additional potential that you could develop?

Not a lot because I think we've got so many opportunities because of the capability to stream real-time in biopharma in applied industrial and clinical. With the slowdown of the life sciences tool market, we have kind of pivoted in the more applied direction. But customers also come at us much faster, for example, in the biopharma space than we would have. A year ago, we did a Capital Markets Day here in London, and we talked about clinical in two to three years applied industrial such as plasmid sequencing and the biopharma piece was really on the horizon and yet they've come at us quickly. So we're responding to that. And also we will continue to take market share. Long-read will continue to penetrate, but we're not banking in the big sort of -- there's an underlying growth curve there, getting to that 30% greater than 30% over the couple of years year-on-year consistently will require us to go after these applied markets, where we have a unique value proposition and there's white space for us to move into.

Got it. I have many more questions, but unfortunately, we're out of time. Gordon and Nick, thank you very much for joining us. Really appreciate it.

Thanks very much.