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

Awesome. I think we're live. Yes, we're live. So thanks again, everybody, for making it. Sorry about being a little late here. There was a technical difficulty on our side. Luke Sergott, I cover life science tools, diagnostics here at Barclays. I have the pleasure of introducing Christian Henry and Susan Kim of PacBio, a newly minted management team. And I think Christian is going to run through some slides and then we can get into the Q&A.

That sounds great. Okay, let's do it. I'll share my screen and we'll get going. All right. Before we get started, I'd just like to say thank you to Barclays for hosting us today. And we have our obligatory safe harbor statement. So I've been asked to remind you that my comments today could 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, with that out of the way, I just want to tell you for a few minutes a little bit about PacBio and about what we've been up to lately. We are a global leader in complete and accurate sequencing technology. We have the most accurate long-read sequencing technology on the market today. And we serve a number of different market areas, including human biomedical research, plant and animal sciences and the molecular diagnostic industry. We offer end-to-end solutions from preparation of the sample to sequencing, which we call SMRT Sequencing through data analysis and informatics. Today, we believe our total marketable -- market addressable opportunity is more than $20 billion. Our flagship product today is the Sequel IIe. It's a product we launched in fourth quarter. And what's unique about it, it provides HiFi reads with a tenfold data footprint reduction. And what this does is it enables a dramatically lower cost to the customer in -- for its compute, allows up to $700 per human genome of savings. And what this does is allows us to sell the product into a much broader number and types of customers. This launched in -- we started shipping this product in November. And sales have been very strong for the product as we talked about in our first quarter earnings release. For 2021, we have really 3 core objectives. First, we're looking at expanding our commercial reach. We're driving our product development pipeline. And then we're really trying to lead the market by showing how our long-read whole genomes are extremely valuable in a clinical setting. And so I want to spend a couple of minutes talking about each one of those. First, with respect to whole genome and expanding our clinical reach, we plan to more than double our sales force this year. We're also putting all of the infrastructure in around our strategic objective of creating a more customer-focused experience, so including marketing, customer support, digital presence, et cetera. So that's a core area of growth for the company. And we believe we can grow because we've been historically very small commercially. Second, we're focused on driving our product development pipeline. We are in the process of developing several new technologies and products that are geared towards higher throughput, lower cost and allowing us to penetrate deeper into the sequencing market. And finally, as I said before, we believe our whole genome -- clinical whole genome sequencing approach provides better answers for clinicians. And so right now, we're collaborating with leaders around the world to drive those proof statements, particularly in rare and undiagnosed disease. For example, we have a very strong collaboration with Children's Mercy in Kansas City, where they're looking at undiagnosed cases. And we're using our technology to better understand those diseases. Speaking of collaborations, in January, we entered into a very powerful collaboration to accelerate long-read whole genome sequencing into routine clinical care. We did this -- we're doing this project with Invitae, which is a leader in genetic testing. And the goal of the product is to develop production scale, high throughput, clinical whole genome sequencing system that leverages our core technology, our HiFi reads. We expect to deliver extremely clinically relevant genomes at a cost substantially below $1,000 per genome. And we believe that this product, once commercialized, will enable Invitae to dramatically move their tests on to whole genome sequencing. And of course, as part of the collaboration, we're also going to be able to broadly commercialize this technology to a number of different users around the world, hopefully driving clinical whole genome sequencing into routine clinical care. And this is really important because more complete detection needs yields more diagnosed. It yields a better understanding of the genome. And there's -- if you look at the history of genomics and genetics from karyotyping to now our long-read HiFi sequencing, we can improve up to 67% more often, the ability for a scientist to understand or a clinician to understand what's going on with respect to the genomics of an affected individual. And we are demonstrating this through various collaborations, presentations and several publications to date that show this. And it's because our sequencing product allows you to look at a much broader spectrum of genetic variation in a much more complete way than any other technology out on the market today. Surveillance of the COVID virus and pan-viral surveillance is an important part of our strategy as well. We have an incredible relationship with LabCorp. And LabCorp is processing thousands of samples per week using our technology. In fact, it's been stated that up to half of the surveillance being done right now is using PacBio's hold -- COVID surveillance technology. And this is a protocol and a technology that we built in coordination with LabCorp and it's delivering results. We've seen many of the first instances of known COVID viruses from South Africa, in particular, being seen on our instrumentation first. And so we think this is an important part of our strategy going forward. We believe surveillance will be a global market for us. And we have a significant opportunity there. We also received a $900 million investment from SoftBank earlier this quarter. This will allow us to accelerate our growth initiatives, everything from product development to expanding our commercial footprint even further. And we believe it puts us in a strong financial footing to grow well into the future. So in summary, we have the leading long-read sequencing capability today. The launch of our Sequel IIe platform is driving growth and strong performance. Our Invitae collaboration demonstrates the power of our HiFi chemistry and the belief that whole genome sequencing in clinical applications is possible and will be done at scale using our platforms. Our commercial expansion is helping us to grow today and truly become a global organization. The investment from SoftBank helps gives us the power to drive all of these initiatives and push the company forward. And with that, I will finish my prepared remarks so that we can get into some Q&A.

Awesome. Thank you. Great background and kind of a great segue into where you're ultimately taking the technology, right? So as I see it and where long-read and the PacBio system has always been, it's had that really niche sequencing market, right, where the microbiology market, forensics, things that are low throughput. And so you've come on and you really invigorated this high throughput push for the technology and going into clinical. And so that's really ultimately the biggest opportunity to sequencing in general in our mind. So give us an idea of how you see that opportunity progressing and where the technology really has an advantage outside of the 67% increase that you showed. Like where do you see the low-hanging fruit from the clinical opportunity?

Yes. Well, I think the reason why you're seeing this new age of PacBio is because of the technology that's been created, the launch of the Sequel platform and then the Sequel IIe, of course. But also the launch of HiFi reads in the fall of 2019 has given us a technology now and a product offering that gives you the most accurate sequencing and the most complete sequencing. And this is the fundamental difference between the long-read capability that we have and others is that we are more accurate than short-read technologies and we provide a better view into the genome because our products are, in fact, more complete. You can see more of the genome, more of the different types of variation. And that's why you're seeing our push into higher throughput and clinical applications, in particular. So what does this really -- what does this mean? This allows us to get into, for example, the rare and undiagnosed disease market, which is a very significant market opportunity. The term rare shouldn't fool anyone. There's an incredible market opportunity there for us to help clinicians understand what's going on with these undiagnosed disorders at the genetic level. And so we're expanding very rapidly into that through collaborations. And as we have new products come online that will accelerate the throughput and drive the cost down, we'll be very competitive because we believe we have a better product and we're demonstrating that today. And very shortly, we'll have new products that will enable us to be competitive and provide the technology at an economics that makes sense for everyone.

Okay. And then -- so I mean one of the key hurdles to sequencing adoption within the clinic has not been the cost of sequencing. It's been education on the physician standpoint, right? Like these guys don't have time to understand bioinformatics and sequencing in general. And so there's a huge data analysis aspect that has yet to be conquered. And then on the front end of the sample prep and sample handling, what are you guys doing to address the whole ecosystem in general so that you are ultimately driving this forward?

It's a really great point, Luke. The sequencing itself is important but it's not the whole story. The whole story is really the end-to-end solution, starting with how do you acquire the samples and process them through the sequencing, through the report that actually gets generated. And historically, these -- our industry has been focused on the scientists and, therefore, not necessarily the report because the scientists like to look at all of the data. And a clinician wants to look at what -- tell me what the answer is. What's unique for us is that our platform actually gives you a better shot at getting an answer. And so what we have to do is we've invested in the core technology. But now we're investing in the front-end sample preparation. So the whole processing from sample acquisition through the library preparation to go on the sequencer. But then also on the back end and starting to think through what are the reporting solutions and the informatics solutions that are most useful for our customers. And that's why this collaboration with Invitae is so important. It's enabling us to create an extremely fast, high-throughput, long-read sequencer. But with their expertise, they're helping us to look at the front end and how we optimize that for high throughput and through a clinical lab. And on the back end, how do we really do the best analysis that we can to give physicians the -- and other people that are looking at this clinical data the answers they need. And so we're partnering with others to do it with a very core focus. Some of the capital we raised recently with SoftBank could be used to develop deeper partnerships, acquisitions, collaborations with those sides of the solution so that we really have a whole solution. I think it is a key factor here as we move forward.

Yes, it makes sense. And just one of the -- I've been -- I initiated with Illumina. I said that they should be the AWS to genomics, right? I mean you have the cloud capability here with the IIe, right? So as that data gets produced -- you guys produce a ton of data on that instrument. It's always been a massive production machine. Talk a little bit about what you're doing with that data. How are you making it a standardized process and providing researchers the applications and tools for the analytics on the back end?

Sure. Well, the first thing to think about is the launch of the Sequel IIe actually changed the game such that the data coming off the machine, it's processed before it comes off the machine. So a little bit less data can actually come off the machine than historically. And that causes -- that's a significant amount, a timesaver. It's also significant cost savings in terms of the compute that happens. What we've been able to do is actually do a lot more of the compute on the instrument. So the data coming off is more usable straight away. We're going to continue to focus on data reduction strategies like that so that you make the data easier to handle to begin with. But it has to go way beyond that. It has to go into the secondary analysis and the interpretation. And ultimately, the flexibility to disseminate that information in any way that a customer sees fit, of course, with privacy concerns and all of those things in a clinical setting considered as well. And so for us, what we're doing is our system is cloud capable. But we are not wedded to any particular cloud provider. We give customers a lot of choice on how they decide to implement it themselves. We have tools actually that allow you to -- that reach into the system, that allow us to help our customers manage their fleet, think through how the data is actually looking and the quality of the sequencing. We'll continue to invest on that. But on the actual informatics side of the data science side, the understanding, we are starting to invest more resources there to develop the reporting tools and the deep analytic tools that allow people to create insights. And of course, it's a very -- the system is like a Swiss Army knife. It can do a lot of different things. And so what you want to do is have informatics solutions for those that want to go really deep and explore from an R&D perspective. And then you want to have "reporting solutions" for clinicians and others that just want to get the answers. And so we're partnering, we're investing in resources. But we see a vision of where the informatics are going to be a critical part of our solution and potentially a competitive differentiator.

Okay, that's helpful in thinking about the ecosystem there. And then you talked a little bit about the application base and building out those capabilities depending on how the demand trends there. Are you seeing any other technologies pop up or other applications starting to pop up around? I mean I know the IIe just came out, right? So you're not going to really see or have any idea here. But -- where do you ultimately see an opportunity around the HiFi read system that evolved like around the SBS with like 10x and like the DSP, digital spatial profiling, had all these other technologies and ecosystem build out around it. Do you ultimately think that the same thing can happen here?

Absolutely, and here's the reason why. If you think about it, long-read technologies haven't been economical. And therefore, they haven't been broadly adopted and ubiquitous. And only now are we starting to cross the thresholds that can enable that ubiquity. And I have a long history in this space as I spent -- I was on the team that acquired Solexa that helped Illumina become the sequencing company it is today. And the thing we found in the early days is that the more of an installed base that we built, the more people created new applications and more applications emerged. And I think the same thing is starting to happen with long-read technologies, particularly the PacBio and HiFi. For example, recently, Dr. Dennis Lo out of Chinese University of Hong Kong published a really important paper of DNase on direct methylation, the ability to direct -- to do direct methylation sequencing on our platform, which, in effect, makes the platform become a 5-base sequencer, which does dramatically allow you to think differently about the workflow of managing -- looking at methylation and looking at that in combination with the long-reads and being able to understand the structural variation. That can create a whole new area of application development that didn't exist before, before that paper came out, for example. And I think you're going to see lots of examples like that over the next several years as we finally get the economics in line with broad adoption and ubiquity.

Okay, that's helpful. And I guess just on the ramp itself, you talked -- your first key point is on commercialization, right? And that was always under invested under previous management. And so give us a sense -- I mean there's been a lot of turnover from Illumina. You guys have picked up a lot of your old friends there. So give us a sense of the key hurdles here and the low-hanging fruit outside of just hiring the very capable sales force. Is it geographic? Is it pushing further into specific customer bases? Give us kind of the roadmap.

Yes. I think there's probably 2 or 3 threads that are critical to us right now. I think the first thread is, is this just direct penetration of the market? And that goes for the United States as well as everywhere else around the world. And we -- this year, we've split up the sales territories some. And we're, in effect, doubling our sales force this year. And what that really does is it allows us to reach the second level of customers that we couldn't reach before because we just didn't have enough bandwidth to actually go see those customers. And those would be core labs and larger kind of individual academic or PIs, institutions where we just didn't really have relationships before. So that's the first piece. The second thread is our penetration in Europe was basically nonexistent. And so we have no footprint there today, no physical footprint, no distribution. And so now what we're doing is we're working to build out that not only the sales team but also become much more like a European company with a physical presence that we can work customers through. I know that sounds a little bit odd in the world of COVID. But someday, we will be out of COVID and we will be back to a more normalized state. And so I think that's the second thread here. We have a very significant opportunity in Europe with our core technology. And part of it is, since we launched the Sequel IIe and we've reduced the compute cost so much, we can reach into different customer types that we couldn't reach into before. And so by getting in front of people and driving this new -- the momentum and the new PacBio really enables us to reach these customers. And so I think that's really strong. We're also expanding in Asia. For example, we just hired a Japanese country manager, who has just recently started. We have basically no presence in Japan. Japan's a big market for DNA sequencing. And so when you think about how do we build our business, this is Phase Ia. Phase Ib is the new flow of products. And then Phase II really is that deep penetration into the clinical markets. And so if we execute well and we drive this the way we think we can, you have a multiyear growth opportunity to penetrate and take the company, become truly a leader in not just long-read sequencing but a leader in the sequencing space.

Makes sense. All right. That's unfortunately all the time we have. I would love to keep this going. And in normal times, we'd be in Miami right now.

That would be fun. Yes, yes.

Yes. So plan on it next year.

We appreciate it, Luke. And thank you for having us today.

Of course, of course. And I'll relay any questions and feedback I get. But excited to see where you guys take this technology.

Great. Thank you.

Thank you.

Bye. Take care.

All right. Thanks, Susan.