Pacific Biosciences of California, Inc. (PACB) Earnings Call Transcript & Summary

All right. Good afternoon. This is Doug Schenkel from the Cowen Life Science and Diagnostic Tools team. It is my pleasure to welcome Christian Henry to the Cowen conference for the first time as CEO and President of Pacific Biosciences. It's also great to have Susan Kim with us, the company's CFO. So thanks, guys, for taking the time to do this with us today. I think what we're going to do format-wise is -- and just Susan and Christian tell me if I'm messing this up already, but I'll hand over to you guys. We'll go through a brief presentation, and then we'll just pivot to Q&A after.

Yes, that's right. We'll just give a brief overview, and then we'll have plenty of time for questions.

Okay. That's fantastic. Well, thanks, guys. Appreciate you being here. Let me turn it over to Christian and Susan.

Okay. Well, thank you, everyone, for joining us today. And thank you, Doug and the team at Cowen for the invitation to speak in front of you today. Before we get started, I want to remind you that my comments might include forward-looking statements. You should refer to our SEC filings for a discussion of the risks and uncertainties that could cause results to differ materially from our current expectations. It's our intent that all forward-looking statements regarding our financial results and commercial activity made during today's discussion will be protected under the Private Securities Litigation Reform Act of 1995. Okay. So with that out of the way, I want to tell you a little bit about PacBio and give you an update on where we are in this -- in our new -- as my new tenure as the CEO. PacBio is a global leader in complete and accurate sequencing technology. We have a range of products that allow researchers to operate in several different critical markets in genomics, including human biomedical research plant and animal sciences and emerging clinical molecular diagnostics. We sell end-to-end solutions. So from sample prep to sequencing to data analysis. And today, we see our total addressable market opportunity is north of $20 billion. Our flagship product today is the Sequel IIe system. It provides HiFi reads with a tenfold data footprint reduction. So this is a system that was launched in the fourth quarter. We started commercial shipments, and it's based on the Sequel II platform, which was launched in 2019. However, in late 2019, we introduced HiFi reads, which is a new way of looking at our chemistry, which allows unprecedented long-read accuracy and completeness of the genome. But as we got into 2020, we determined that we needed to push more of the capability onto the instrument itself. And so we developed a Sequel IIe system and launched it and started shipments in November. And the primary difference here is that it provides on data instrument processing, which results in a 90% reduction in storage and roughly 70% to 85% reduction in analysis time. It's cloud enabled, of course. And this -- what this really means is that it enables compute cost savings of over $700 per human genome, which really adds up as you start looking at high throughput applications. The other thing that's so compelling about this instrument is because of the reduced IT footprint, we can penetrate into smaller labs with the system. To kind of give you a sense of our most recent performance. Last quarter, we did $27.1 million, which was 42% sequential growth. We -- at the end -- at year-end, we ended with over $300 million in cash. And of course, just a couple of weeks ago, we added another $900 million through an investment from SoftBank, and we'll talk about that in a moment. And our current installed base is about 203 instruments around the world that are doing, in the fourth quarter, roughly $180,000 of consumables per year per system. So just thinking about our core strategies for 2021, we really have 3 key areas where we're driving the company. First, we're expanding our commercial reach. The company historically has had a very small commercial footprint. And as I -- when I joined the company at the end of September, this was a key area of focus for me is pushing our commercial organization, putting more feet on the street and driving our capabilities on a global basis so that we can reach more customers with our very competitive solutions. I'm pleased to report that so far, we've made a lot of progress, and we're well on our way to more than doubling our sales force in 2021. But we've also added significant executive talent at the COO level; in marketing positions, we've added a new Chief Commercial Officer. And so what we're doing is we're building the team to enable us to have long-term sustainable growth. The second core strategy in 2021 is to accelerate driving our product development pipeline. We have several new products in development. And one of our core strategies is to become a multi-product portfolio that allows us to focus at each different customer type with the product that they need. In 2021, you'll see us continue to improve our current products and make progress towards developing products that will push us below the $1,000 genome, which is a key high watermark for the company to get below in order to drive demand. And then finally, our third area of focus is driving our market leadership position in whole genome clinical sequencing. The way we're attacking this is through a number of different collaborations. And for example, last week, we had a press release with Children's Mercy of Kansas City, where they're expanding their installed base of sequencers with a focus on pediatric rare and undiagnosed disease, a very exciting prospect for us. So those are our 3 core strategies, and we think that will help us grow in 2021, but it will also drive our growth in 2021 and beyond. In January, we announced a collaboration with Invitae, which is a leader in genetic testing. And this is a joint development agreement where we will be producing an ultra-high throughput sequencing for Invitae so that they can transfer some of the hundreds of thousands of samples that they do every single quarter onto a whole genome sequencing platform. In order to do this, we -- Invitae is funding the development largely of our -- of a new sequencer that is based on technology that we've had in development. And that sequencer will launch in Invitae's labs over the next few years. But along the way, Invitae is helping us with understanding the front end workflow in a clinical setting and helping us drive informatic solutions that will be essential as we get into creating the long-read sequencing market. Now we think PacBio is uniquely situated to provide whole genomes in the clinic because our technology provides the longest reads, longest and most complete genomes on the market today, and so it's very exciting. The one other thing I'd like to point out is that whatever product we end up developing with Invitae, PacBio will be free to broadly commercialize it. So many customers will be able to benefit from this very important collaboration. And just another thought on long-read sequencing and thinking about the evolution of developing insights through genomics to drive improved clinical yield, improved understanding of the genetic basis of these very tricky diseases such as in rare and undiagnosed disease. If you think about the history of genomics going from karyotyping to microarrays, to short-read sequencing, every time that we've had an increase in the ability to see into the genome more clearly, we get better answers or the field has got better answers, and there have been significant commercial opportunities. We're at that point now with the HiFi genomes provided by PacBio, that long-read sequencing can provide the most complete genetic profiles of every sample and can improve the solve rate or "understanding of a particular case" up to 67% over original technologies like karyotyping. And we think this will be potentially one of the killer applications for the company and drive long-term growth into the market. Not only are we focused on rare and undiagnosed disease, our technology is uniquely suited to surveillance in the COVID pandemic. And we've been partnered with LabCorp to develop a protocol and a capability in order to look at different variants. And in fact, LabCorp has been expanding their installed base with us. And currently, they're looking at thousands of samples per week to understand the genetic variation associated with the SARS-CoV-2 virus. And what's so fascinating about this is that they can multiplex over 900 samples per run, which drives very strong economics to them and allows us to really understand what's going on with respect to the variation of the virus. And so this is a really important collaboration that we're leveraging to expand our presence in viral surveillance programs. You'll see from us over time, the ability to look at not just COVID but also a number of different viruses. And we believe in the long run, pan viral surveillance will be an important application for the company. So to finish up here, we have a -- we were fortunate enough to receive a $900 million investment from SoftBank a few weeks ago. And this investment allows us to continue expanding on our core strategies of driving the commercial organization, accelerating the product development pipeline and ultimately driving these collaborations such that HiFi sequencing can become the standard tool for population genomics and potentially altering the practice of health care. So we're very excited to be partnered with SoftBank here, and we believe this gives us a solid base from which we can drive our growth initiatives for 2021 and the future. So to close, the Sequel platform really gives us the leading long-read sequencing capability. The IIe itself is driving our strong financial performance, but also driving ubiquity into the market. Our collaboration with Invitae is signaling a new era where clinical whole genome sequencing with HiFi technology will be fundamentally enabled. We -- as we expand our commercial footprint, we think that drives near-term revenue opportunity. And of course, finally, the funds we received from SoftBank will be able to power our growth initiatives. And so with that, I'd like to say thank you to Doug and the Cowen team, and we'll turn it over for any questions.

Thanks, Christian. That was helpful. Good place to start. And obviously, lots of exciting things to talk about and a lot to unpack. Maybe if I can take it up a level. You took the helm as CEO of Pac in mid-September. You weren't new to the story then. You joined the Board in 2018. And I don't think it should be lost on anyone that you knew a thing or 2 about sequencing before you got to PacBio and you spent almost 12 years in a leadership role at Illumina. What got you excited enough about PacBio to actually move into this role? And as you're quickly approaching the 6-month mark of being on the job, what has changed in terms of your assessment of the opportunity? What's better? And then what are the other areas where you think you may have a little bit more work to do than you originally envisioned?

Yes. That's a good question, Doug. And so I'll start with why did I decide at this point in time to join PacBio, and there were really 2 fundamental things that pushed me there. First was the fact that I saw that the HiFi chemistry was really driving unparalleled accuracy in the market, which gave a unique competitive advantage to the company that I think is fundamental and durable. And so seeing the HiFi chemistry with the Sequel II platform, and I knew at the time the Sequel IIe was on its way, that it seemed as though the technology was at a point in time where with the right leadership and the right commercial mindset that we could actually start to drive the business forward. The second was -- so that's really the first. The second is all about where I see the future product development going for the company because the fundamental challenge with the PacBio technology is that it hasn't scaled in a way that drives massive adoption. And today, the sequencer can sequence about 300 whole human genomes a year, give or take, which isn't enough to drive the thousands -- hundreds of thousands of samples that are available in the market. However, the company has R&D programs in-flight and development programs in-flight that upon looking at them gives me a lot of confidence that we can, in fact, get to that sub-$1,000 genome and get to a scale that fundamentally allows us to be truly the market leader in whole genome sequencing. So we had the technology accuracy and the completeness of the technology. And then I got comfortable with the fact that we had a set of technologies that were in development that didn't -- that -- yes, there's always some innovation going on in order to get to the next generation, so to speak, but it's largely a development program in engineering and et cetera, to get us to that next level. And so those are the 2 fundamental things that said, okay, there's a great opportunity here. And then finally, I saw the strategy unfolding in really 3 discrete ways. So the first is the simple fact that the Sequel IIe platform is a great product, and it's a great platform, and the company didn't have a commercial footprint really to sell it. And so the first leg of growth could come from adding sales force and adding commercial infrastructure and being more strategic about how we go to market, and that's something that I have a lot of experience in and a lot of ability. And so I saw that as a way to get some early wins. And then with the new technology coming on, enabling the $1,000 genome and below then that's the second leg. And then the third leg is kind of this notion of ubiquity in clinical whole genome sequencing. And I think that's what got SoftBank so excited is that they see the fact that this technology potentially could really get to the concept of every baby born being sequenced. And as you know, Doug, we've talked about that many, many times over the years. And I think the value of a HiFi genome is such that it will be more valuable than the cost, so to speak, and therefore, will drive that ubiquity. So those are the main reasons why I decided to join.

Do you -- so that's helpful. And it's interesting, right? Because I think if we go back to you and I when we had this discussion when we ran into each other before the Illumina-PacBio deal was announced. But I mean, like if you go back to mid-2018, there were questions about whether Sequel II was actually going to work. And if it worked, if the company could actually produce the chips at acceptable yields from a business standpoint. Midway through the process of Illumina and Pac trying to get married, I think we figured out that the technology worked and the company can produce this at an acceptable scale. But what kind of got suspended during that period was the next step, which was basically refreshing what felt like at least from the outside, kind of, a tired organization in terms of really just -- maybe there's a better way of putting it, but having the right commercial infrastructure in place to basically go out and get the most out of a new product that worked and have unique attributes. And as we sit here in 2021, as we turn the corner on the pandemic, which was obviously another wrinkle for the company to fight through. You now have a product that works that has a compelling value proposition. So even -- let's put the pipeline aside, better commercial infrastructure is going to lead to success, at least over the next year or 2. Is that a fair assessment?

Absolutely. And I think, Doug, you said it exactly right. If you go -- many people probably ask, "Well, gosh, Christian, you were on the Board at the time, why were you okay doing the Illumina transaction." And yet here today, we sit in a whole new -- a whole different place. And to those folks, I would say that a lot of the Board's thinking was centered on the timing of how these products could get to market. You're right, the unknown of would the Sequel II platform, how successful would it be? And I would say -- so the Sequel II was really started shipping in earnest in -- what, in Q1, late Q1, early Q2 of 2019, and which was after the deal had already been announced. And so it took -- and the launch went better, I think, than people expected. So that kind of gave us some momentum, coupled with HiFi coming on at the end of the year. And all of a sudden, we're kind of in a different spot. But then the acquisition fell apart, and then you had COVID and all these other things. And so it gave me a real -- it gave me a very unique point in time to join the company, and then convince several new executives about why this is such a compelling opportunity. And you're exactly right. We needed -- you know what I didn't answer part of your question before about what was maybe not what you expected. And I would submit to you that the infrastructure of the company as a whole was not prepared for the commercial scale that I believe we can achieve. It just wasn't. And it was very focused on R&D and developing products, but not necessarily with a super strong customer focus. And so what we -- I was a bit surprised coming in how much more work there is to do. And actually, Susan is going to take -- Susan's building a lot of infrastructure, everything from systems on how to really understand our customers to how to go to market, to how to track and create consistency in our business from quarter-to-quarter, which we all know matters, right? It's essential to have a consistent business that you understand deeply and you understand what your customers are. And so we've been very fortunate to hire some amazing folks, including Mark Van Oene as our COO; and Peter Fromen, who you know very well, is our Chief Commercial Officer. But then below Peter, we've actually hired several Vice President level folks that are world-class experts in marketing for the sequencing business. And I think that combination really will set us up well as we start to drive multiproduct portfolio, as we start to drive a road map of how we launch future technologies so that everything is a lot more, shall we say, orchestrated so that people can -- we can live up to our expectations consistently year after year.

As you sit here today, you're -- correct me if I'm misstating this, but I think you mentioned again, the goal is to double the size of the commercial infrastructure. I think the rule of thumb on that has always been, it takes at least 6 to 9 months to see really a return on those hires or at least to kind of see what they're fully capable of just from an efficiency standpoint and ramping perspective. How would you say the hires -- so first off, is that right? Is that how you're thinking about it? And then secondly, how is recruiting going? I mean, you said it's going at least to plan. I mean, given kind of the product works and you're changing the culture and it's well capitalized, is hiring basically maybe even going a little bit better than planned?

Hiring is definitely going better than planned. And to kind of put it in perspective, what's interesting is that as you hire some great people, turns out they know great people. And so you get this kind of snowball effect that we're starting to enjoy. And I think not only are we getting the feet on the street we need, but we're also getting the leadership. So for example, in other territories in the world, we run -- we want to really truly run a global basis -- a global business. And I think we're hiring in -- like we just recently hired a country manager in Japan, and we're adding folks in Australia and further into China. And those are all really important hires. And the reason why we've been able to get some of them is because they see the new energy in the company, because they see some recent strong financial performance and they see the fact that we're well capitalized. It gives a salesperson a lot of hope and excitement that, "Hey, I'm going to have a great product to sell. I'm going to be well supported. And I'm going to have a portfolio of future products that I can sell that allow me to hunt for new customers and then serve our existing customers exceptionally well." So I think we're a little bit ahead of the game. I think it does take a few quarters to get people up to speed and rolling. And so the goal is to try to build up the team as quickly as we practically can. And so what we'll do is we'll hire a bunch of salespeople and build up that commercial footprint and then pause a little bit to get everyone up to speed and drive the culture in all of the infrastructure. And then we'll hire another bolus to get -- help us get to the next leg. So that's the strategy. And yes, so far, I think it's going actually really, really well.

When I think about the sequencing market today, I mean there's truly scarcity value associated with any sequencer that works. You have one that works and works well and has a runway to get better. I guess I just wonder, how do you define success? I mean, I know why I thought of this today, but I remember, I think the first time I met you, Christian was probably just getting ready for this meeting, as I was thinking about it and it popped into my head. I mean I just got asked to pick up tools, it was 2007, 2008. I spent a day in the Bay Area, meeting with Applied Biosystems. And then I flew down to meet the SoftBank company and company called Illumina. And the contrast and culture was palpable. I mean it went from the big entrenched leader to seeing volleyball courts and Pickleball courts and things like that. But I think if I pull up my notes from that meeting, I don't think Illumina would have said we define success is basically essentially taking over the sequencing world, and you had hopes. But the success was just to build and grow, not to necessarily replace first-generation sequencing. As you sit here today, I mean, my guess is you're trying to replicate some of the culture that Illumina had in '07, '08. But I wonder, is success defined as basically unseating Illumina? Or is it just being a bigger player in a growing market?

Yes. I think it's such a great question. And actually, I've spent some time talking to the Board about this specifically. Success to me is defined by creating useful products that can fundamentally change the face of genomics in health care. I mean that, at the end of the day, is really what we exist for, and our employees are passionate about and why we get up and work really hard in the morning. But in order to create that consistent future durability, we need to have growth. And you're right. I think Illumina is an incredible company and has done amazing things and will continue to be a market leader. So our goal isn't necessarily to supplant Illumina, 100%. I don't think this is a market anymore where one player takes all of the market. 20 -- 15, 20 years ago, it was different, right? Because it was just research, and it wasn't even whole genome scale. I mean it was just the basic research. And therefore, the markets weren't big enough. Today, we're talking -- I mean, in my slides, I talked about a TAM of north of $20 billion. And so now you're talking about success being the ability to serve parts of that market properly and fully and really understanding the customer. And so I'm extremely passionate about our customers and what they're doing and how do we contribute to their success. But then on the flip side, so then you carry that to the financial side of the equation because I know a lot of folks look at that. And for me, I talked to our executive team all the time. Look, our goal right now is to get from $100 million to $500 million and then from $500 million to $1 billion in revenue, and we see paths and roadmaps and strategies to kind of -- to get to those places. And by doing that, it's not necessarily our goal is to replace Illumina as a sequencer in all these accounts, our goal is to grow our business, create durable, long -- nice, high gross margins that allow us to keep investing in the business and drive cash flows and returns to shareholders. But at the end of the day, the real success is when you see the press release that we helped a researcher increase, solve a rare and undiagnosed disease patient, that changes their life. And that's -- at the end of the day, that's why so many people get into biology to begin with, is to fully understand the molecular basis of humanity and life and then the genetic basis of disease and then how that contributes to humanity. And along the way, we can create an incredible business from that. And so that's how I think about it.

Yes. No, that's exciting. And it's -- it will be interesting to see what you can do with a sequencer that uniquely works well today with; a cap to improving that and actually getting it out there commercialized and supported in a way that Pac hasn't always been able to do well historically. And then you take that cash infusion from SoftBank and that puts you in a position to presumably be more aggressive in investing organically and inorganically to basically fulfill that vision. Is that a fair way of thinking about it, Christian?

Absolutely. I think it's really important for us to keep focused on our business and creating scale and looking at -- looking both organically in multiproduct portfolio, as I've talked a lot about today, but also at potential inorganic opportunities, what are adjacent markets that are interesting, do that have -- we have synergy with? What are parts of the workflow, maybe where we can create competitive advantage by working with others more closely? And some of that funding, of course, gives us the firepower to think big. And the one thing you'll know about me is I've always been big thinker, like the desire to grow, think big, do this with joy and passion. And that's what we're doing here at PacBio now. And I think we're off to a great start. We have a lot of work to do. We're still a small fish in the sea here, but we're making progress every week. And like the COVID surveillance stuff, it's so exciting to see how our technology is making a real difference and is a really strong alternative to anything else that's out there right now, and you see companies like LabCorp really embracing it and helping us in the United States really understand COVID better. That's a really cool thing.

All right. Unfortunately, we're out of time. Sorry to keep you a couple of minutes late, but I really appreciate Christian and Susan, the two of you spending this time with us, and we look forward to keeping the dialogue going.

Thank you, Doug, and we appreciate it, Cowen, and we'll talk to you soon.

Thank you.