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

Thank you, operator. Good afternoon, everyone. I'm Derik De Bruin, the senior life science diagnostics tools analyst from Bank of America. Welcome to our 2021 Virtual Viva Las Vegas Healthcare Conference. Our next company presenting today is Pacific Biosciences. And with us today from PacBio is President and CEO, Christian Henry; and Chief Financial Officer, Susan Kim. Christian, Susan, welcome. Thank you for being here and participating in our virtual casino fest. With that in mind, Christian, I'll turn it over to you. I know you want to make some opening remarks, and then we'll jump right into Q&A. So all yours, sir.

That sounds great. Thanks, Derik, and it's great to see everyone, and we appreciate being here today, thank you to BofA Securities. Before I get started, I need to tell you about our safe harbor. I've been asked to remind you that my comments 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 is our intent that all forward-looking statements regarding our financial results and commercial activity made today during the discussion will be protected under the Private Securities Litigation Reform Act of 1995. With that out of the way, I'd like to just spend a couple of minutes telling you a little bit about Pacific Biosciences and where we're going and give you an update on our business progress. We are a leader in global -- a global leader in complete and accurate sequencing technology. We participate in a more than $20 billion market, and we bring a range of solutions to a number of different customers in human biomedical research, plant and animal sciences and clinical and molecular diagnostics. If you look at Slide #4, we achieved record revenues in our first quarter of $29 million. This is our third quarter -- our fourth quarter in a row of sequential revenue growth. Our year-over-year growth was 86%, and we shipped a record number of Sequel II Systems, of 41 systems, which gives us an installed base of 244 systems. Now for those of you that aren't familiar with DNA sequencing, we provide long-read DNA sequencing, which allows you to look at very long stretches of DNA, and we do this through a razor-razorblade type model where we sell instrumentation. And then we sell proprietary reagents and provide proprietary software solutions to interpret those DNA results. Recently, we -- over the last 1.5 years or so, we have been launching a series of new products that have fundamentally changed the power of our sequencing technology, and we call that HiFi sequencing. In April, we launched our latest grab of that capability, our HiFi sequencing and software release 10.1. This improves the quality of our data, more reads than ever are at a Q score of Q30, which means they're 99.9% accurate. The highest quality in the industry. We also reduced our DNA input requirements by threefold over the prior generation of technology. This gives us the ability to access many new types of samples and expands our total market opportunity. We've also simplified our system by enabling a concept called Adaptive Loading. And now we can -- with our system and our capability, we can enable hundreds of thousands of genomes per year. This technology, if you look at Slide 6, is being used in a number of different industries. But what's perhaps most exciting is our partnerships with companies and organizations like Children's Mercy Research Institute, where they're using our technology to uncover the mysteries of rare and undiagnosed disease. And here, you can see that how excited they are by using our technology. And in fact, in the first quarter, they expanded their installed base so that they can do more sequencing and try to unravel the mysteries of pediatric rare and undiagnosed disease. We also offer a best-in-class solution for COVID surveillance. And we are in partnership with LabCorp to look at SARS-CoV-2. We've created a world-leading workflow that allows LabCorp to sequence thousands of COVID samples per week and with the goal of identifying new variants and understanding how the virus is changing. Our solution is very cost-effective, very flexible and also gives incredible results and we're really proud of that collaboration. And we're expanding our work not only with LabCorp, but we're creating our own fully kitted COVID surveillance kit, which we will then use as a stepping stone into more surveillance type kits in the future. So pan-viral surveillance, for example. We historically -- I know this is a health care conference, but we do like to -- we're very proud of our leadership position in plant and animal genomics. And there's 2 projects in particular that are ongoing right now or have been going on. First is the Vertebrate Genomes Project where there was a recent flagship paper in Nature magazine, which highlighted our HiFi sequencing and the power it has. The goal of that project is to sequence all known vertebrates. And so a very ambitious project. And then, of course, the Darwin Tree of Life program being operated at the Sanger Institute is trying to catalog 70,000 species all found in the U.K. Our technology is uniquely suited for these applications because we have long -- with our long reads, we have unparalleled accuracy, greater completeness, which allows you to, in fact, see more of the genome than any other technology out there. Finally, in January, we announced a transformational collaboration with Invitae. Our goal there is we're developing an ultra-high throughput sequencer, so a new platform that will help Invitae sequence hundreds of thousands of genomes a year. This highly scalable platform that we're developing will -- is done in collaboration with Invitae, where Invitae is providing incredible support with respect to the workflow, and we're providing our next-generation technologies into the collaboration. This -- Invitae is paying the cost of the development phase of this program, and then we will sell those products to Invitae and they will recoup their investment through preferential pricing on whole genomes. We think this is a very important project, not only to the company, but to the world, in that it will really enable whole genome clinical sequencing at scale. When we look into 2021, we started the year thinking about 3 core objectives, and this is Slide #10, for those of you that are following along. The first objective was focused on expanding our commercial reach; second, followed by driving our product development pipeline; and finally, really demonstrating our leadership position in whole genome clinical sequencing through collaborations, such as the one with Invitae, Children's Mercy, et cetera. I'm pleased to report we're making progress in all of these areas. We've greatly expanded our commercial team. But our hope is to double our sales organization by the end of the year, and we're well on our way to doing that. In terms of our product development pipeline, we have multiple transformational products in our pipeline that will drive costs down, increase performance of our sequencer and, of course, continue to have the hallmark accuracy that we're known for. So very exciting. So in summary, PacBio is really moving -- pushing the envelope forward with respect to our long-read sequencing capability. Our HiFi sequencing workflows are driving Sequel II and IIe adoption. We had record placements in the first quarter. We are making progress against our core strategic objectives. And of course, we ended the quarter with over $1.1 billion in cash, which allows us to fund our strategic priorities. And with that, I will turn it over to you, Derik, for questions.

Great. Thanks, Christian. So a couple of questions, just that sort of just struck me sort of looking to that. So when you're doing long read, what's the better diagnostic yields, right? I mean, if you're doing things with like Children's Mercy and then the hospitals, like how much better is the diagnostic yield using long read versus short read purchase?

Well, it's obviously going to vary, Derik, from case to case. But in general, you're seeing yield moving from 40s into the 60s -- 50s and 60s. So you're seeing -- it's a material difference. And the reason for that is you're seeing more of the genome versus short-read technologies that can't see as much as the genome as we can. We can find not only the single nucleotide variants, but -- and the small insertions and deletions, but we can also see the larger structural variance. And the combination of that gives the clinical researcher more insight into what's going on. And so we are seeing a dramatic improvement.

So that then sort of like feeds into the next question, which is, certainly, some people in the industry would think that long-read sequencing is a niche technology. I don't know who those people would be, but some of them -- maybe some people, obviously, do think that. So how should we ultimately think about the real market for this? Because I mean, there's -- seriously, not that you've thrown out there at like $2.5 billion TAM. You are getting more of a diagnostic yield as you've seen that more of the market would move towards that. So I'd love your sort of thoughts on where you sort of see the market now? And then I've got some other ones on that.

Sure. Well, I think the reality is that the world is very different than it was 10 years ago, than it was 20 years ago, where one technology would rule them all, for example. And where we are today, long-read sequencing provides significant benefit with respect to seeing more of the genome. And if you look through the course of life sciences history, anytime a technology that could come along and provide a greater hypothesis preview or a more complete view of what's going on in the biology, those technologies tend to get adopted. Now the barriers, of course, are cost and throughput and time and utilize -- and ease-of-use. And we're breaking through all of those barriers. And so it's my belief that we can become a major factor in most of the markets. Now in the clinical sequencing market, I think, it's clear -- it's becoming more and more clear every day that whole genome sequencing approaches using long-read technologies to see more completely the genome will become the predominant way that sequencing gets done. In fact, if you look at it today, the whole genome clinical sequencing market really doesn't really exist yet and that's because most diagnostic companies are using exomes or short-read whole exome approaches, which gives them information, but the relative benefit of a whole genome using short-read versus an exome isn't that much. But when you go to a long-read genome versus a short-read exome, the difference is dramatic. And that's where you're going to see adoption. So my expectation is that PacBio could become a very strong leader and really be the market enabler of whole genome sequencing in the clinical application. So my expectation is that's going to be an area where the company could play a very significant role and capture a very significant market share. There's other parts of the market where short-read sequencing is very useful and is very strong. And so it will become -- it will be -- the short-read sequencing approaches will likely continue to be the majority. However, we're finding all of the time that our tech -- that there is more long reads or long pieces of DNA sitting in blood, for example, than anyone ever really appreciated. And so the ability to take advantage of that using our technology will help create new applications that will allow us to build our business into markets, such as liquid biopsy, perhaps prenatal diagnostics, et cetera. And so that will be an area. And it -- very simply put, if you can see the whole genome economically, cost effectively and efficiently, then it's likely you're going to want to see the whole genome using these sequencers.

Yes. Well, I mean, you preempted my FFPE and my self -- circulating tumor DNA question. So I'll skip that. I mean it sounds like that's not impossibility, but it's a work in progress.

That's exactly right. And actually, there are FFPE approaches. Now of course, FFPE samples generally have the DNA somewhat degraded. And so they're more difficult to manage for long-read sequencing. But there are organizations and groups out there that are developing sample prep techniques and capabilities to enable that part of the market on our sequencers.

So then how should we think about -- if you want more information, it's not just clinical, well, what about the population sequencing project? I mean, that just seems like another area where you -- I mean, just as you saw the biobanks originally used microarrays, then now they're sequencing, now that they go to long read. And basically, are there still going to be sampled when it's all said and done, I mean if you go back and just look at all these things. So how do you through see those double pops sort of evolving?

I think that -- I think you almost answered the question for me in the sense that you're right, as these technologies allow you to see more economically, they will move -- these kinds of programs and projects will move more to a long-read framework because, for example, using our technology, you can see telomere to telomere now. And where no other technology could get you there before. And so that -- the insights that we will gain scientifically, we don't know yet, but we don't -- but it's the next frontier. My expectation, though, is that these population scale type programs will run kind of a hybrid of short- and long-read technologies, and it will be dependent on lots of factors, cost, efficiency, throughput, ease-of-use of the systems. And as our systems become more powerful, we should be able to capture more market -- more of that market share. But I'm -- and I suspect projects will likely be run in somewhat of a hybrid mode for the foreseeable future. Perhaps, 1 day, they move substantially to long read. But for us to build a great business, we need to capture parts of that market. We don't necessarily need to capture all of that market.

Okay. So then that leads to the next question was, what does the cost curve look like for PacBio? The latest NHGRI data that I saw showed whole genome sequencing at around $600 a sample. I guess, is that price point achievable to PacBio? And what sort of is the time frame because we look for that?

Yes. So we believe that, that price point is absolutely achievable and achievable over the next couple of years as we develop our next generations of technology. Those products are already deep into development. And so we have some view as to when they will come to fruition. And at that point, we believe we will have not only the cost for genome but also the throughput that will enable the scale required in these high-throughput laboratories that are doing significant amounts of whole genome sequencing. Of course, those that are in the market today that are at $600 genome will keep moving. And then it will become -- and we believe that we have the technical capability to go even beyond that. And so we have to be anticipating that. However, we believe that there is a value add to our product versus others in the market. And it will be interesting to see in some markets, that value of a genome will be much higher. So for example, in the clinical whole genome market, our expectation is the price of a genome will be different than in the population sequencing basic research market. And so it will be important for us to demonstrate how the value proposition that we bring to the market, and so that we can price the products accordingly.

So let's talk about additions of it. So I mean what are the really interesting things about the long read technologies that you do and PacBio -- and Oxford does, if you do have the -- you do have the ability to read the methylome, right, on your -- right that.

Yes.

So the question is like do you get a better -- did you do a premium pricing for adding in the methylome on top of that to that information. But I'm going to flip that also in the fact that if you go back and you think about the synthetic long read can kind of Illumina's bundle in, some of that old molecular technologies sort of like a hybrid, but there's one from the past that has been...

Yes, it is.

So maybe sort of like bundle in that old molecular technology to do like hybrid, to basically do like a cheaper synthetic long read where basically that gives you the extra space where -- that gives you the extra headroom in that space, where they might not need your long read technology.

Yes. That's a great question, Derik. And I think you know as well as I do that synthetic long-read technologies have been trying to emerge for a decade. People have been working on this for a very long time. And what we found is that -- what we're finding at least so far is that as our accuracy continues to improve and our completeness, people would rather see the direct long reads than a synthetic long read. And that's one reason why synthetic long reads haven't really taken off. And I don't expect -- I don't necessarily expect them to take off in any horizon. Even with that being said, our long-read technology is coming down in cost, the cost curve fast enough where it's sort of irrelevant where the differential in price, people will likely choose the direct long read most of the time. It doesn't mean that they won't be able to capture some market. But at this point, it sure seems overwhelming that people want the direct long-read sequencing that we provide.

Got it. And the methylation question?

Yes, the methylation question is actually a very important point. You're right, we can look at methylation directly, which is very powerful. It basically makes our sequencer a "5-base sequencer" and the way you manage that, I think, is part of the value proposition. So whether you decide to charge differentially or not, I don't think we've made any determination. But my objective would be to -- we want to be the company that provides the most value to our customers in the market and the most -- and we believe we provide that value through the deepest lens of looking at the biology of the genome and the most accurate view of that lens. And so my expectation is that we would drive -- we would use our ability to look at the methylome as a key feature selling into these markets and capturing market share from folks.

So you've -- we briefly touched on some of the other long read technologies out there. I guess, what sort of is the status right now of the Oxford versus PacBio debate. I mean that still rages. And you obviously are now flushed with cash and a lot of runway to go, but from what's published in the papers, it looks like they're planning on doing an IPO and they've got plenty of cash. So how do you sort of see the head-to-head on these things going in terms of accuracy and market opportunities because it just seems to me that this debate is going to start escalating a lot in the next -- in the foreseeable future, yes.

Yes. Well, I think there's a couple of things to think about. First of all, what they've done at Oxford is remarkable. They've created an interesting product. However, it does have some limitations relative to our product in terms of accuracy. It's our understanding that our accuracy is at least in order of magnitude better than their accuracy. And on top of that, the variability of our act -- from run to run of our accuracy is much less than theirs according to what we see. That said, I'm sure they're going to keep working on -- being well capitalized and being very smart folks and having a great team. They're going to keep pushing their accuracy. That's why we're going to keep pushing our accuracy and you're going to continue to see new products come from us and new ways of imagining the technology and then driving that throughput and cost curve down. We've been very fortunate in the market where we have won lots of projects with our -- when we go head-to-head with them. And so we feel very confident in our capability. That said, they're a very strong player. And I think as they get more capitalized, they'll continue to be a strong player. And my belief is that we can create products that will help us win.

So switching topics for a bit. Can you talk a little bit about the COVID prevalence and viral prevalence. What that opportunity means for PacBio? And I guess how your approach differs from that of Illumina?

Well, I don't -- I think our approach is a little bit different than Illumina's other than -- not so much in business form, but in technology, our long-read sequencing capability allows us to do a surveillance -- create a surveillance protocol with fewer amplicons. And so it allows you to look at haplotypes a little bit better. It allows you to look at -- it allows you with fewer amplicons, you can have fewer dropouts and so you get a more complete view of what's going on with the COVID genome. Also, our system is uniquely positioned in the sense that it's got the right batch size to run. It runs 960 samples at a time. So it's very inexpensive to turn the machine on and you get great value with roughly 960 multiplex, whereas Illumina has a much higher multiplex and it's more expensive to turn the machine on because the reagent price is higher. They get good value, but it's -- actually our system is cheaper. And so with customers like LabCorp, they've scaled up on our platform and they're running our platform, thousands of samples every single week. Of course, Illumina has the scale that we don't have yet. And so on a global basis, they definitely have a bigger proportion of the global COVID surveillance market. But our product is quite strong and quite good and it gives us an opportunity to penetrate deeper into the U.S. market and potentially into the U.K. market and some of these other major markets where we have some of the presence. And so I think it's a good business opportunity for us. It's a multimillion kind of business -- dollar business opportunity that we're working on and working happily with LabCorp on this right now.

How much of the instrument placements in the quarter were driven by LabCorp? And I guess, sort of like thinking about the instrument run rate for the rest of the year?

What was the first part?

How many -- how much of the instrument placements in the first quarter were driven by LabCorp?

Just over 10% were driven by LabCorp, give or take. So the business across the board, we have a lot of multiunit orders in the quarter, which is exciting because our customers are scaling up. And we also had a lot of new customers during the quarter. And so people are getting engaged with HiFi, the HiFi chemistry and getting -- my thesis is that if we build more of a commercial organization, we should be able to see a ramp in system placements, and it's my belief that we can do that and continue to do that. And so we shipped 41 systems last quarter. That was a record for the company. And my goal would be to continue at levels that are consistent with this, if not grow them over the second half of the year as we get our sales force -- our new sales force up to speed and productive.

Got it. One final question as we sort of come to the end of -- the bottom of the hour. You just got a big chunk of cash from SoftBank, over $1 billion on the balance sheet. How should we think about capital deployment? I mean does all that go into R&D and building the business and commercial structure? Or are there things on the side that you might be interested about?

Yes. I look at it in 3 different components. The first component, of course, is accelerating R&D and working not only -- and really developing the ability to build a multiproduct portfolio, so that we have multiple R&D programs going on at once, not only the next generation of technology, but the N+1 generation. So that -- the capital on the balance sheet gives us the ability to do that. And so we'll be working on that. The second area, M&A is -- and scale will matter to us. I think it will matter to all life sciences companies. And so I look at that across 2 different dimensions. One dimension is bolstering our workflow. So for example, on the front end in sample preparation, developing technologies -- or acquiring or developing or partnering to create technologies that enable us to make the front end more elegant, simplify it, allow more samples to get more sequencers. And then, of course, the bigger kinds of ideas would be how do we leverage our commercial capability, how do we leverage our R&D capability with opportunities that might be in adjacent markets or platform technologies that serve similar market, but we can get synergy that way. I think these are all important things that we're thinking through. But the reality is that we have to be patient, and we have to be focused on building a great business and improving execution. Anyone that knows me is I'm very, very, very focused on strong execution and we're -- we've got PacBio moving in the right direction, and I look forward to kind of driving that and then feathering in with our great management team opportunities as they arise.

Great. With that, we're out of time. Christian, Susan, thank you so much. Investors, thank you for listening. We appreciate your support. Thanks for coming but -- early but often. Be safe everybody. Have a great day, and thank you.

Thanks, Derik.