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

Good morning. My name is Hassan Al-Wakeel, I'm Head of European MedTech and Services Research at Barclays. I am delighted to have with me today the management team of Oxford Nanopore. So CEO, Gordon Sanghera; and CFO, Nick Keher. Welcome, both. Thank you for joining us in sunny Miami.

Thanks for having us.

Why don't we start with a bit of an overview question. And I guess if you can talk through the evolution of the Nanopore story since going public and how you think about the evolution from here over the next 3 to 5 years?

Absolutely. On March 9, a few days ago, we hit our 20th birthday since inception. It's still staggering to kind of believe that is a true statistic. It seems like yesterday. But what we set out to do was to commercialize single molecule electronic detection, a brand-new measurement platform and our first application area of DNA, RNA sequencing. And what we focused on was to think about how we could be highly differentiated from everything else out there. So sequencing by synthesis, you have to make a copy and you lose quite a lot of information. We wanted to look at native DNA. And so in addition, the single molecule sensing electronics, so you have no colors, no chemistries, means that you can make very small form factors. So one of the things -- I come from a blood glucose point of care background. And the thing that struck me about DNA sequencing 20 years ago, it's still true today, it's large, centralized mainframe and batch based. So very similar to mainframe computing for those of you old enough to remember that in the late '70s, early '80s, and you never really got that crossing the chasm to distributed sequencing, that's a lot about AI last night and industrial revolution and the people who were there are the people who distribute tech. So that's always been our unique value proposition, affordable, accessible, unique data, and kind of the same revolution is mainframe to desktop to handheld in the computer industry. And that's where when we get into our growth in a really difficult market for life science research tools is coming from our ability to really cross the chasm into those application areas, which is what we've been focused on as we laid out in October '23 in our Capital Markets Day.

Excellent. And when we think about Nanopore's role in a health system in a country or many countries, where could we see some of these touch points, some of these growth areas from where you are today?

So I think the obvious advantage of something like this is point of care and the fact that we can stream data in real time. So what I mean by that is 5 or 10 minutes after you add a sample, you're immediately getting sequence data off. So one of the projects that we've been working on for the last 3 years, pioneered by Guy's and St. Thomas' Hospital in London was to look at respiratory infections in intensive care units. Now over 3 years, there was a post long COVID study to start with. They've amassed 450 patient data points. And 45% of those patients are given an antibiotic that is broad spectrum and ineffective. And it takes 2 or 3 days before you get your result back using traditional path lab. With the MinION, they are getting their results in 2 hours and they can immediately change treatment and get them out of intensive care quickly, so there's a real cost benefit argument. Now that study is now going to be piloted across 30 NHS trusts. So this idea of having continual monitoring in real time in acute and critical care, and then add on to that, an additional benefit. And if that 30 trial works well, which it will because we've been very careful in the first trial at Guy's and St. Thomas', they'll roll it out to the whole of the NHS. But you get an additional benefit in that when we first saw COVID in England, it was an intensive care in London. And most people bet that the next pandemic is going to be respiratory. And so having this respiratory metagenomic scanner. So it's like an always-on pandemic radar. And what Guy's and St. Thomas' did, they also have a direct link into [ Portadown ] in the U.K. so the biosecurity are continually looking at any novel new variants. So you get 2 bites of the cherry. It's a really good example of how distributed real-time nodes can have a huge impact. Now that is something that we're talking to people over here in the States, in Europe, Asia Pac. Everybody wants to trial this and they just want to see how that next phase of rolling out of the NHS trust goes. And I think that will be game-changing and important, both for acute and critical care patients but also for this always-on pandemic radar.

That sounds really exciting. I guess beyond this, what other conversations are you having with government implementing nationwide genomic programs when it comes to treatment or prevention?

So I think the other thing we bring to the party is the unique value proposition that you get a fully comprehensive genome. And because we can do short, long and ultra long reads, we can get things that you cannot see with other technologies specifically, and there's a lot more talk from the legacy players about the fifth base methylation, which is a smoking gun in all cancers. So we can see that. There are structural rearrangements. We're all used to single point mutations, which is what your short read systems give you. But there can be arrangements that are long, thousands, even tens of thousands of bases in the wrong place on that 3 billion letter human genome. So structural variation and another short repeat expansion read. And so that whole fully loaded genome, we're seeing ever-increasing traction. We have our flagship program in Singapore, PRECISE, where they're doing 10,000 long-read genomes and a subset several hundred of what they call, telomere-to-telomere. So full comprehensive local reference genomes. So you become -- you're no longer relying on a generic North American or European genome. But as you will know, in Singapore, we have 4 populations, local, Malay, Chinese, Asian. And having comprehensive reference genomes is ever increasingly -- the more you do that, the more you see the diversity and everybody will need their local genomes. So that is really powering fully comprehensive genomes 20 years after we had the draft genome. And that really enables researchers, whether they're in biopharma, discovery, or underpinning complex rare diseases to really start to get at what is referred to as the dark genome, where some of the most common hard to diagnose diseases, neurodegeneration, rare disease and some pernicious cancers are hidden, wrapped in that dark genome that we can unravel.

Great. And we're going to talk a bit about guidance in a moment. But just to cover off what you were talking about, have any of these conversations changed with governments given, I guess, the funding backdrop and the uncertainty that we're seeing that's prevailing the industry?

From our perspective, because of the affordable accessible nature of the system, we can set up with quite low entry cost, PromethION 24, and do 10,000 genomes. We can rack those out in a year. So you're not embarking on 100,000 or 500,000 genomes over a 3- to 5-year. It's quick. It's easy. It's comprehensive. And we're seeing -- 4 years ago, we had our Emirati Genome Program, which is 100,000 UAE genomes. Today, we have multiple tens of thousands genome programs where we're seeing that traction, and that's because the signal to noise on the richness of content of Nanopore data means you don't need a huge case control study to really find the signal from that very low signal in that noise. And that is continuing to grow at pace.

And then if we pivot a little to some of the nearer-term metrics and guidance for this year. Guidance obviously came in at 23% growth for the year, and that was below the midterm CAGR of 30%. Can you talk a bit about the level of caution that you're baking in from NIH funding as well as export restrictions?

Yes, of course. So I think it's worth reflecting on what we just delivered in '24 as well. So when we were sat here actually, last year, we said we grow 20% to 30% on an underlying basis at constant currency. We delivered 23%, so in line with the guidance. And we said we would see a reacceleration of growth in the second half to above 30%. And we delivered an exit rate for the second half of 34%. So essentially, we did deliver against what we said we would do in the year just gone. As we've come into this year, clearly, the business has done extremely well in the second half last year. Every region in growth, EMEA 44%, APAC 33%, the U.S. 12% as we exited. But we could already see there's maybe some uncertainty towards the end of the year. And well, more at the beginning of this year, sorry, around the NIH funding that has been crystallized with the kind of announcements that we've seen come out. Now what we didn't want to do was provide guidance where we just ignored the risk, particularly the kind of NIH piece was there. And we didn't want to have to update the market continually about our guidance or this has got worse than we expected. So we decided to take the noise out of the number. I think we're in a fortunate position where the business is growing extremely quickly. We have considerable demand for our technology. And we can essentially -- we have taken that noise of the risk out of the number altogether. So NIH or federal funding in the U.S. is around about 10% to 15% of our group revenue. That's our maximum exposure to it. So any channel where that funding could come through, if we would have added back for this NIH or federal funding risk plus we gave a little bit of caution in terms of exports to the Asia Pacific just in terms of control restrictions, you'd be back into that 30% CAGR range. So it's worth noting as well for Q1, we were above our -- that 20% to 23% growth rate. And we said that to the market on the day of results. But we're just providing a bit of caution here as we go into the year because it's still uncertain. It's uncertain about what's happening in the U.S. If it gets better, we'll update at the half year with a better number. And if it gets worse, we shouldn't necessarily worry about it, given the derisked nature of this. So we've taken out the number.

Even for next year?

Yes. So essentially, what we've done here is taken out all the uncertainty from the number and the go forward from that perspective. So when that -- when any more news around federal funding, we should be kind of covered for it.

And you said that Q1 was above the guidance range for this year. Could you elaborate on where you're seeing strength, where you're seeing uncertainty?

Yes. Absolutely. So for the U.S., what we saw was -- what we're seeing is a single-digit growth rate because even though we've got that uncertainty around federal funding, the Americas is a strange market for us because research and government is circa 50% of our revenue versus 70% for the group because there's other areas like applied, biopharma and clinical are already 50% and are growing very quickly. So Americas, even with this uncertainty in the market, is still like low single-digit growth at the moment. For EMEAI, we exited the year growing 44%. That's a good number to keep with for how we're seeing the first half and the first quarter in particular. So because that has less uncertainty as a backdrop, and so it's just a cleaner pull-through. Asia Pacific, like I said, we exited last year at 33%. We're in the high 20s at the moment. And that's because we can see a bit of potentially timing risk essentially with regards to the orders that are there. And as we get through the year, hopefully, that kind of uncertainty becomes certainty, we can kind of really view the number to the upside.

And then if we think a bit about the research business, I mean, how is the business growing ex U.S. in terms of government-funded customers?

Strongly, because like I say, it's the U.S. piece, which is actually the lowest proportion of our research and government as an overall proportion of the pie. And that may be because we're playing in the backyards of all of our competitors essentially. Asia Pacific, because there's less capital commitment that's been made historically, we get people looking at our equipment very quickly and are adopting it. And EMEAI, there's a lot of new opportunities we're seeing and a lot of interest in the product. The kind of key metric that we kind of alluded to results as well was the PromethION 24/48 fleet and the increase in utilization per device that's out there. So we pointed to a 53% increase in utilization per device for the larger PromethION fleet. That is just kind of demonstrating the fact that we are -- the technology is coming of age, it's maturing, commercial infrastructure is maturing, customers are getting more familiar with the product and they're just buying more.

I think just one other point on that, the regime change in the U.K. Wes Streeting, Health Secretary, openly said he wanted to work out how we can utilize what we have in the NHS. And so we are -- they have funded, the Office for Life Sciences are funding a 50,000 genome program with the U.K. Biobank. So we've got the integrated medical records. And what we are looking at there is the fifth base, so methylation. So the first comprehensive atlas. Now that, we expect to be, A, replicated globally but, B, looking through and using machine learning AI to accelerate the associations between the fifth base and all these different disease cohorts. It's going to be really exciting. It's a really good example of how Europe is still continuing to fund these basic research programs.

And then maybe outside of research, I mean, you alluded a bit to the opportunity in some of the applied markets. Can you talk us a bit through industrial, clinical, biopharma and how you see the next 3 to 5 years for Nanopore.

I'll do the outlook and you can do the numbers, yes? I think from our perspective, in Capital Markets October '23, 6 months earlier in that year, we reached a performance level in terms of accuracy and throughput that puts us fairly and squarely equivalent with legacy sequencing by synthesis things. So that happened 2.5 years ago now. And we started to think about how we can really pivot from -- we continue to service the research market. It's still 70% of our revenues. But how do we pivot to end-to-end workflows because of the affordable, accessible, low-cost barrier to entry, ease-of-use, all these parameters. We wanted to start to target 3 areas: applied industrial, clinical and biopharma, and we really have grown that space. And if you look at our growth in last year, it's around the applied market. In the 3- to 5-year time frame, we expect that 30%, 70% split research -- applied to research to be 50-50 or even growing faster in the applied markets. And we have a very clear strategy around the target areas to hit those numbers and growth.

Yes, absolutely. So as we kind of showed last year, the growth rate in the applied industrial space was 42% on a reported basis, probably about 45% on a constant currency basis. That is a good number to kind of look for or project forward as we look to the next 1, 2, 3 years. They might even step up. For clinical, we're seeing a lot of adoption by customers, particularly in the rare disease space and for things like carrier screening that we've got with the Asuragen now online and within oncology overall, as Gordon has talked to because of the methylation benefits. Within biopharma, that's where we could see this will be a lumpy year, but we grew 22% last year on a reported basis. That again is a good number to kind of project forward, but it will be lumpy because it's a lot smaller. As we go into next year and the year after though, we're under evaluation with various biopharma companies. Once those evaluations end, I'd expect to see that revenue number potentially growing a lot quicker than double digit.

And then we've seen a fair few contract wins recently. Can you talk a bit about, I guess, the process behind these contracts and what excites you most of some of the recent announcements?

So I think a couple of things. We've been working with bioMérieux on drug-resistant TB, which is today, post-COVID, the #1 killer, particularly in low middle income countries. World TB Day is 6 weeks away mid-April. We'll be announcing a product with them and rolling that out. With Asuragen, it's a Bio-Techne-owned company. We -- it's the first of a range of tests we're going to put out and it's for carrier screening. So this is rare disease parents looking to have children, both got rare disease histories. And again, that is rolling out now. In that case, we are replacing Sanger sequencing. So when we think about, in the applied industrial bucket, plasmid sequencing, we're replacing Sanger sequencing. So this is something like a $1.6 billion to $1.9 billion opportunity, which is low-hanging fruit, which is not really long, but it's long enough that the legacy systems were never able to take that market. And that's why we're seeing such strong growth in the applied industrial sector, but there are clinical applications in there as well. That's a really rich short-term fertile ground for us. And as we -- as Nick said, on the biopharma side, as we move from evaluation to lockdown and having regulated platforms, full end-to-end automation sample to answer, that will start to transition some of the biopharma opportunities to routine use both in discovery and in biologics manufacturing as well.

Why don't we pivot a little to competition? And can you talk a bit about how you see the competitive landscape given some of the announcements that we've seen from potentially new entrants? Do you think that there's more of a threat of competitors moving to long read as a kind of a nascent threat?

So I mean, in the long read space, as we all know, there's PacBio. And when you look at Roche's Xpandomer, sequencing by Xpandomer, I think, they have a Nanopore and we have a Nanopore. So we both do electronic single molecule sensing. But at that point, the technologies diverge completely in opposite directions. We chose to spend a decade creating the most exquisite detail with our sensing technology. So we have IP and know-how around engineering the Nanopore. They chose to take the DNA. And if you think about Nanopore from top to bottom, there's about 30 DNA basis contributing to the signal. They chose to make it all the same. So they have a full base system rather than, I don't know, with all the modifications, people talk about 15, 16 bases in DNA alone and RNA, it's more again. And so they have GTAC, very high signal to noise. So in effect, they've been able to produce a very high-throughput, large machine, but squarely goes head-to-head against the high-throughput machines, whether we're talking about Ultima or Illumina's NovaSeq. And that's clearly where, if you like, that's where they put their tanks for now. Can they make smaller versions, distributed sequencing where we want to go? Probably. But that's not where they're starting next year. Can they get to native DNA? Well, not with the current chemistries because you're washing out all the richness of content. And we very much bet our strategy on having that exquisite sensitivity and that richness of content, which I think is demonstrated in the last 2 years in our growth where everybody else has struggled to even get single-digit growth. So that's kind of how we see the difference between this. So it's going to be putting pressure on sequencing by synthesis legacy systems.

What about China? What are you seeing in that market? How is the competitive environment shaping up?

So in China, China was about 8.8% of our revenues last year. We grew 11% underlying, which essentially, I think, is very good compared to the competitors that are out there. China is a bit of a different market for us in terms of actually the customer pull-through is actually more in the clinical applied space than it actually is in the research space. Not all, but we do see significant pull-through there for kind of those sort of workflows already. What we saw last year was a tightening of export control restrictions even to hospitals, the children's hospitals and things like that, which was disappointing, but that's just kind of the world we're living in at the moment. It meant that we had a few million dollars worth of slippage last year as well, which kind of took us off the midpoint of the guide. So what we've done this year is say, well, actually, this may continue and it might just tighten as we go forward. So again, we decided to be cautious and essentially remove that risk for the numbers and put haircut on our entire China business. If we get through the year and that doesn't materialize, then again, it's one of the reasons why we'll be coming in with a stronger number.

And then maybe a final one, given the time. Can you talk a bit about the bridge to 62% in terms of gross profit? And how you see mix particularly evolving in the next year?

Yes, absolutely. So for gross margins for the year just gone, we delivered 57.5%, up from 53.3%. So the underlying improvements that we delivered across the PromethION Flow Cell manufacturing capability, but also on devices because we recycle devices as well, drove the significant part of that underlying upgrade. In terms of the headwinds that kind of offset it, we did see some mix impact from a change in revenue line as our MinION franchise kind of came down and our PromethION range became the biggest part of our group. As we enter this year, we're expecting MinION range to continue to actually to go back into growth, and it's our highest margin product line. And we're going to see considerable growth from our PromethION range, but the margins are a lot better now. So this mix impact is going to lower. In terms of the customer base we have out there, top 5 customers are less than 8% of revenue. We have a very fragmented customer base out there. So actually, in terms of pricing risk per customer, it's actually relatively low. So from those things, all ticks. As we get -- how do we get to above 62% gross margins in '27. The big steps, again and again, be on PromethION Flow Cell. So improving yields in manufacturing because at the moment, we still have to make a certain number before one can leave the door because we want to make sure it's the right spec for the customer. So improving yields will increase the gross margin on the product. But the big piece is going to be where we recycle the flow cell. And on that, we have actually started initial steps. So for the MinION Flow Cell, over time, we can plot the journey from -- when the product was first launched, the gross margin now yield improvements and then recycling that essentially led to a big step-up in gross margin. PromethION is on the exact same track. And actually, with the recycling of the flow cells now, if we can do it to the same extent as we do for MinION, then we're talking at least a 10% gross margin increase to the PromethION range, and that will take us squarely above the 62% we got in the guidance and actually maybe a bit better. We said greater than 62% all along.

Excellent. Great. Well, thank you both for today's session.

Thanks.

Thank you for having us.