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

Hey everyone, good afternoon. Thanks for joining us at the Morgan Stanley Global Healthcare Conference today. I'm Tejas Savant, and I cover the life science tools and diagnostics sector here. Delighted to have Pacific Biosciences join us this afternoon. And representing the company, we have Christian Henry, CEO; and Susan Kim, CFO. Welcome to you both. Before we get into the Q&A, just had a quick safe harbor to rattle off. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your sales rep. So with that, Christian, welcome, again. Clearly, just to set the stage, I mean, there's been a transformation underway at PacBio since you took the CEO seat about a year ago. You have the SoftBank deal. You have the Invitae collaboration. Since then you've purchased Omniome and Circulomics and strengthened the commercial team, of course. So as you look ahead to 2022, could you outline for us what you think is the next leg of your strategy in terms of unlocking value?

Yes, sure. And Tejas, thank you so much for the opportunity to speak today. It has been a pretty remarkable transformation for the company. And today is actually marks my official 1-year anniversary. So this is kind of a day of reflection and also a day of looking forward. And I think what we've done in this past year is really set the stage by building the infrastructure to allow us to grow for the next several years. And that's really going to be along a couple of different fronts. First, on the long-read portfolio, we have world-class capability and world-class technology to really give people deeper insights into the genome than any other technology in the market today. And the challenges with the technology, as you know, are throughput and cost. And so the core strategy is get new platforms and products to market that drive the cost down and drive it down by both increasing the amount of data you look at per run, but also the number of runs you can do per year. And we're working on those 2 dimensions. And so when I think about 2022, the top priority is wrapping up those research and development programs so that we can get to products that, I believe, will transform the space. So that's got to be job number 1. But while we're doing that, we have to continue to build out our commercial capability, such that we can be truly a global company at the time of the launch of these new products so that we can scale on a true global basis, which will accelerate our revenue, but more importantly, it will drive adoption and reach more customers than ever before, which I think is foundational. The reason why that's so important is not only does it drive revenue, of course, but more importantly, the customers are the ones that generally are the first to discover and then cover new applications and new ways of using the technology. And when you enter into an acceleration phase, like we're heading towards, it will be important to enable the customers to use the technology and develop new applications and then support them because who knows that next application might be the killer app that pushes your growth even further. So that's going to be a top priority for 2022. It's consistent with our strategy of where we started, when I started the company. The second core strategy is to really drive the Omniome -- finish the Omniome acquisition and then drive the product development program, such that we get products on time with the specifications that we're looking for that will make it competitive. As we said when we announced the Omniome acquisition, we believe this technology is highly differentiated in the short-read sequencing space, and we'll have the applications in oncology, prenatal testing and any application where you see the need for high accuracy and lots of reads. Our initial products will go to market at somewhere between 600 and 1 billion reads per flow cell, and that will really enable us to have a very competitive product in the market. What we've seen when we did our diligence with respect to Omniome was that the data quality and the accuracy on a base level was roughly 15 fold higher than anything on the market today. That difference will matter a lot in applications where you're looking for needles and haystack. So 2022 will be focused on integrating the company so that we're one organization. We're not a long-read side and the short-read side, we're one integrated R&D team and accelerating that product to market. Once again, having the commercial organization, such that it is, will enable us to go to market globally with the Omniome technology, which, I think, will give us some competitive advantages over some of the emerging players in the market. And so those are the top 2 strategies. The final strategy, I would say, continues to be focused on developing proof statements, proof statements around the power of long-read sequencing, particularly in clinical whole genome applications. I firmly believe that whole genome sequencing in clinical applications is truly the killer app for long-read sequencing. You get a more complete view of the genome. You have more ability to -- by having that complete view, you are able to uncover the mysteries of the genome at a much deeper level, which will provide clinical utility and, therefore, value to the healthcare system, which will enable payers to pay, and most importantly, patients to get -- potentially get diagnosis. Of course, these are research use-only products today. So I want to make that crystal clear. But those are probably the core 3 strategies that are focused on. Of course, there's a myriad of other things and maybe the last foundational piece is just our fundamental execution from quarter to quarter. The company did not have a strong historical track record of execution, and we've put a lot of investment thought, time, experience into putting the infrastructure in place to drive that execution. And it's starting to pay dividends already, but I think it will continue to accelerate in 2022.

Got it. Lots to unpack there. So maybe we'll start with the commercial side of things. Christian, in the past, you've spoken about a number of low-hanging fruit when you started in the CEO role, large genome centers in the US as well as important countries in Europe and Asia, where you had no on-the-ground presence. How many of those customers and regions are you hitting at this point, given that you're well underway to doubling your sales headcount by year end?

Yes. I think we've made a lot of progress. And where you see the progress is in a couple of different ways. First of all, you're seeing opportunities and the sales pipeline starting to come from different territories that we had no presence in before. And the one thing that maybe surprised me a little bit in this first year is it does take a long time to build a new territory from scratch, perhaps longer than I expected. However, by applying resources and focus, you're starting to see from territories, where we had no sales presence at all before, opportunities come into the funnel and then through our processes, hopefully turn those into orders and shipments and new delighted customers. And so that's, I would say, on balance, we're probably 60% to 70% of the way there in terms of what I believe the commercial build-out required to drive us for the next several years. And it is kind of seeing them come into the funnel. It's also starting to see the discipline of the funnel in the sense that when an order is committed at the beginning of the quarter, and we put it in the forecast, and we communicate it to investors, etcetera, that we have confidence that, that order will end up coming through. And we're still going through a maturation process of teaching the existing sales force, the methodologies we want to use and insuring and training the new sales force coming in is the same sort of thing. So that we have a consistent language. We understand where opportunities are. We understand how to execute at them. I'm pleased with where we've come. I mean, if you think about it, we've had several quarters in a row of sequential growth. The last few quarters have been record revenues, all time for the company, and we continue to be in that sort of mode and trajectory, and that's so critical to build that installed base in front of new product launches because, of course, the first place where you want to go when you launch new technology is into your existing installed base because the payback periods of new technology will be so short, many customers will be compelled to invest in it to keep moving forward. And so I think that's a big important driver of how we think about where we are today and where we're going. We're not done doubling the sales force yet, but we're making good progress, and I suspect we'll continue to drive out sales. We didn't talk internationally at all. And I still think we have huge opportunities in Asia Pacific, in the largest territories in Europe, Germany. I just signed an offer approval for a new person today in EMEA. And I think we're kind of building that team in EMEA, both UK, Germany, Benelux, Netherlands and there's just a lot of opportunity there for us because we just didn't have any presence. We still don't have any presence really in Eastern Europe or Russia or -- and even in Southern Europe, we're still principally driven off of distributor relationships. And when I say no presence, I mean direct sales. We still have distributors that are serving those territories, but the truth is you want to have direct -- you want to be able to directly touch your customers and be in understanding what their needs are so that you can offer them solutions that will make them excited to be part of the PacBio family. Asia Pacific is still very greenfield, Australia, New Zealand, and we hired a country manager in Japan, and that's already starting to pay some dividends, but we still have lots of opportunities in Korea and the rest of Southeast Asia, Singapore. So what you're hearing me say is it's a pretty -- it's a full-on assault on the global marketplace, and we have a lot of opportunity in front of us. And we still have a lot of work to do to build that team, so it's cohesive. We meet our objectives, and we have that consistency of execution, which is really the hallmark of a great company is the ability to innovate and then execute on that innovation.

Got it. In terms of the productivity of the sales force, have things gone to plan, I mean, especially in terms of the earlier cohort, obviously, this is an ongoing process? But are you happy with where things stand? And the context for that question is when folks look at your -- the guide that you issued on the call, there was a little bit of disappointment around sort of like upside versus where Street numbers were and the question was, well, are these salespeople that Christian hired and continues to hire, are they really translating into the numbers?

Yes. I mean, I believe that they clearly are translating into the numbers. We're looking at growth north of 60% for the year, which is solid growth. Now 2020 was a COVID year, so you can do it every while at that. But the reality is we're starting to reach more people and our footprint is really starting to enable us. Now with respect to the guidance, I mean, the truth is, at least from my perspective, my job is to continue us to drive consistent execution quarter-after-quarter. And you have to remember that the guidance that we provided, that's the first time that we'd ever provided any guidance whatsoever since my tenure. So maybe there's others in the market that could do a better job than we can do, but I'm not so sure. And so I'm very happy with where the guidance where -- that we actually got to a point that we can even deliver guidance because now that means we start to have a lot more depth of understanding of the market, of our ability to execute in that market, etcetera. And I think that the way I think about the business is about growth, consistent growth quarter-after-quarter, innovation, execution, and so from that perspective, I feel really good. And I also feel that the sales force is starting to come into their own. And I think there is a learning curve. When we first started talking about this, we talked about it takes at least a few quarters to get them up to speed. I think that notion is probably still generally true, except for in territories where we basically had no presence. So in situations where we're splitting territories and putting 2 reps in, the new rep there, I would expect, to get up to speed much faster than a greenfield territory, where it could take 3 or even 4 quarters to get up to productivity. And we're starting to -- we're seeing that in some of those territories, and I probably could have appreciated that more. But on balance, I'm actually very satisfied with where we are, and I'm excited about where we're going.

Got it. I'd like to pull in Susan here. I mean multiunit orders, not the easiest thing to handle as the CFO. Operationally, I mean, are there things you are doing to sort of smooth out the lumpiness to the extent possible, perhaps in terms of the pricing arrangements or perhaps incentivizing your sales force to get customers over the line earlier in the quarter versus in the last couple of weeks? How are you thinking about that?

That's a very good question. So I think one of the things that I'll start with is in terms of multi-instrument orders, the larger projects, one of the things that we've instilled in the company or we implemented in the company is a big deal review process. This didn't exist before. This is something we implemented last quarter, where we're having discussions regarding the customer negotiation regarding the opportunity and what are the economics that make sense. So that is a new thing that we've implemented. We do have a pipeline of multi-instrument orders that we do talk through. And it's pretty exciting because we have opportunities that we're looking at in the near-term kind of within the next couple of quarters. But we're also talking about opportunities that are well into 2022, even as far as the end of 2022. So the pipeline of these multi-instrument orders and certainly, the conversations and the number of conversations we're having are increasing, which is very exciting in terms of the momentum. Now in terms of incentives, I'm less concerned with driving incentives just to try to meet a number within a quarter. It's one of the reasons that we guided to a year versus guide to the quarter, because at the end of the day, our goal is to give our customers the product and solutions they need on the time line that they need them. So I'm less worried about that. Having said that, we are implementing incentive plans across our sales organization to drive for growth and really paid for performance. It's a new concept for the sales organization, where we're really trying to compensate for anyone who is going above and beyond and maybe not compensating as much, if someone comes in below quota. So this is a shift with respect to our sales incentive strategy. And then, of course, your last question with respect to linearity in the quarter, that is also very important. We're very focused on it. There's a lot of dynamics that come into play with respect to linearity in a quarter, and it's something that we're continuing to improve. I will say some of the dynamics around kind of what's happening in the macro environment does play into it. So sometimes that's challenging, but it's something we're very focused on, and we measure, and we look at it week by week.

Got it. Very helpful. And then, Christian, as you think about sort of the Sequel IIe, I mean, clearly had a number of improvements on instrument data processing, shortening the turnaround time, etcetera. What are the future improvements that you view as key to expanding the use cases for the platform and perhaps even starting to penetrate a subset of those clinical applications for long read makes sense?

Yes. Well, I think that the Sequel IIe still has improvements to be made, and we'll make those as there -- we'll make them available as they're ready, and I would expect 2022 to have improvements to the Sequel IIe platform. The area where we're focused is decreasing run time, improving the ability to call all the bases, improving the accuracy -- further improving the accuracy of the system, which is our hallmark and where we are clearly the leaders. We want to continue to lead and keep potential competitors at bay, so to speak, from that perspective. We also expect to continue focusing on the front-end sample prep and making that easier, more robust, more automated so that you get more consistent results every single time. And I think that's really, really important because that will distinguish us from others get a consistency of results every single time. So those are a couple of areas. One of the big improvements we made in 2021 is reducing the input requirements of DNA down pretty dramatically actually, and that allows us that -- any time you can reduce the input amount of DNA required, that opens up more potential TAM for you to go after, right, and more samples. So we'll continue to focus on those types of things as well. With the acquisition of Circulomics, that team will be laser-focused on how do we make the Sequel II sequencing process the best it can be.

Makes sense. I have a question on Circulomics actually. Before we get there, China is obviously an important market for you. You recently highlighted an IP lawsuit win in China. Can you elaborate on that? And is there an appeals process that we should be keeping an eye on?

Yes. So it's my understanding -- I mean, so basically, this was a invalidation effectively of the patents. And so there -- I'm sure there is some sort of appeals process, but it's pretty unlikely. And there is that lawsuit continues on in the United States. And so we have to -- we do think that the ruling in China definitely helps the US case, and we'll see how that goes. I don't like to comment on the outcome of IP litigation because let's face it. It's complicated and there's a lot to it. But we were very happy with the outcome, and we believe that was the right outcome, and so we'll see how it goes. But as we get more scale, and we get bigger, IP litigation is part of life sciences, and we've a great team building our own IP and defending our IP. And we're growing that team a little bit to make sure that we're ready to go. But yes, I'm very satisfied with that outcome, and I think it's obviously a great outcome for us.

Got it. Circulomics, I mean, can you talk about sort of the high molecular DNA extraction process that they have? How is it sort of advantageous over sort of current existing methods? And then secondly, in terms of just the fraction of their 700 customers, a large proportion of those were using Oxford Nanopore for their long-read work. Does that open up some interesting sort of cross-selling opportunities for you essentially into their existing user base that you didn't touch?

Yes. I think so the first thing I want to say is that we are fully committed to all of the customers for Circulomics' products on the market, whether they are using Oxford Nanopore, BioNano or PacBio. Of course, having understanding who those customers are, we can evaluate and create opportunities to go talk to those customers about our offerings. And I think that that's something that we should do and will do. The Nanobind technology is really, really cool, and the primary advantage of it over other techniques is it's very gentle on the DNA and it allows you to create really long fragments of DNA, which then you can control how you want to -- what length you want the pieces to be so that you get a much more consistent sizing of the DNA before it even go -- from the extraction before it even goes into the library preparation processes. And by doing that, the higher quality the DNA that you can get at the beginning of the process, the better sequencing results you're going to get, the more consistent sequencing results you're going to get. And that's why this is such an intriguing opportunity for us. Kelvin Liu, who is the CEO of Circulomics, is now part of our team. He reports to Cathy Ball, our Senior VP of Research, and they're hard at work on optimizing the workflows now for PacBio technology because now they can become much more intimate with how we do our sequencing on the SMRT Cell and how they can work upfront of that to both extract DNA and then also automate the whole library process and sample, the whole library prep process so that we can operate at higher scale. And I think that's going to be a really important theme for us is developing the end-to-end workflow as we launch higher throughput sequencers because we don't want to have a setup where sample prep takes longer, it's impractical to do the sample prep on the number of samples that you can put on the sequencer because that would be a real big problem. So we're trying to solve all of these problems, so that as we get new fundamentally higher throughput products to market, we are offering solutions that will serve our customers exceptionally well.

Got it. Omniome, any updates to share on the FTC process, Christian? And then clearly, having a short-read technology in-house that is going to expand your TAM, but it also changes the scope and focus for PacBio a little bit from a company sort of squarely focused purely on long read. How do you envision the combination working together over time? And how are you going to make sure that you stay focused on both sides of the story? Is bundled pricing something that will sort of factor into that? And is that something that you think customers will appreciate?

Yes. So starting with the FTC, so the FTC deadlines have passed, and we did not get a second review. So we're in the final stages of getting all of the documentation right to get the deal closed. My expectation is that we still will close the acquisition before the end of the quarter, which is super exciting because then the faster we can get the acquisition closed, the faster we can start getting into collaborations with some key collaborators, so that we can get that data, the Omniome data out there to the world so they can see the power of the technology. And I think that's going to be really important. So we're on track to close this quarter. When you think about how we run Omniome inside of PacBio, it all starts with creating one integrated R&D team. And it's not -- our intent is to fully integrate the company such that we're not having people work along lines of long-read or short-read. We're having the chemists work with chemists, the informaticians work with informaticians, the engineers work with engineers, and truly integrate at that level. And the reason for that is PacBio brings a tremendous amount of capability to the Omniome team in terms of technical know-how, surface chemistry, die chemistry, etcetera, and that will help accelerate the Omniome product development. And then on the other side, the Omniome team has great engineering capability, great optics capability, also great chemistry capability, too. And so we'll integrate it that way. From a commercialization perspective, I do think there will be great opportunities to cross-sell, to bundle products in unique ways to create whole solutions. And so our objective is to actually go to the customer and help understand their problems so that we can come with solutions that are agnostic to technology per se, whether it's long- or short-read. And ultimately, down the road, I would expect us to integrate the products in unique ways, particularly on the front end and on the informatics side, whether we decide to create integrated sequencers that do both. I don't believe that that's probably the way that we'll go in any near horizon, but we'll explore all opportunities and how that will work. But that's how we're going to run the company, and that's why I'm so excited to get the deal closed and get us started.

Got it. And can you remind us sort of what remains to be done ahead of a broader rollout for the system in terms of flow cell density and other cost metrics? And when can we expect to see some publications that demonstrate the performance of the box?

So my expectation is that next year, we'll see plenty of publications on the performance of the box and be able to openly share lots of data with customers. We intend to be very transparent with how we're doing from that respect. What needs to get done is when we announced the acquisition, we commented that the company was effectively ready for their beta tests of the instrumentation and their existing workflow already. And they actually are and doing some of that kind of work. So we wanted to really focus on the front end and clustering and those kinds of things, so that we can get even higher density and a more scalable workflow. And so that's really what we are working on or that we will work on once the deal is closed as a first priority, in addition to industrial engineering of the instrument to make it even more usable and things like that and then starting to get the data sets and the proof sets. The manufacturing organization is in really good shape for a company at its size. We'll integrate manufacturing entirely. And the one area where they have is flow cells that we don't manufacture, but they've already manufactured over 10,000 flow cells. And so they have some pretty strong expertise there, which is exciting. And then on the instrument side, we will work together a lot of that manufacturing is already outsourced, and then it's in-sourced for assembly and test. And so we'll find the best ways to integrate that. But that being said, I think customers will start to see data next year and as we gear up for a global rollout.

Got it. A couple of topics that I want to hit on, but we're just over time. So let's do a lightning round, if you will. In terms of just a progress update on the Invitae collaboration, Christian, I mean, anything new to share there in terms of defining the milestones and the feasibility analysis, if you will?

Absolutely, on track. The project has been well defined, on track. And the working between the teams has been fantastic, actually, much higher -- well above my expectation.

Got it. Susan, one for you. Given the surge here, we've seen in August and September, are you still feeling good about sort of the midpoint of that guidance range of about $130 million? And how things played out in terms of site access for your reps?

Yes. So we're still sticking to our guidance. And I would say that in terms of site access, for us, it hasn't been too concerning this quarter. If anything, one of the things that's nice about our infrastructure is that 90% plus of our installed base of Sequel IIes that's connected to our network, so we can see the utilization, how much our customers are using the instruments. And that trend line continues to be up and to the right. And that is a function of the growing installed base and the fact that our customers are using their instruments. So all of that is promising. It's a little bit different by region, but nothing overly alarming. Maybe in the month of August, there were a couple of labs in APAC that shut down for a little bit, but they have since reopened, and we're having good conversations leading into quarter end.

Got it. Anything on the supply chain front that you have your eye on and then sort of inflationary pressures there that you're seeing?

We're definitely seeing price increases on the supply chain that will have some impact on GM over time. The things we're buying now impact us quarters from now, right. They don't impact us this quarter, I would say, but it might, but not generally. And in general, the supply chain is in good shape. We do see the biggest risk in actually the instruments, not the chips at this point, but we've been able to mitigate those risks, Mike, our VP of Manufacturing, has done a great job of planning out the supply chain and really solidifying our position through the end of next year. So, so far so good on that front.

Got it. Plenty of cash on the balance sheet, following SoftBank's investment. How are you thinking about allocating that capital? I mean, you've obviously, you've not have closed Omniome, but that was largely financed by the pipe. What types of acquisitions would make sense, Christian, as you think about bolstering the portfolio over time?

Yes. I think the first thing we really want to make sure we execute very well on our Omniome acquisition and the Circulomics acquisition. So that's first and foremost in our minds and on our base business. So we have a lot to swallow right now. And I really want to make sure we execute exceptionally well there. However, that being said, our focus on M&A is along 2 dimensions. The first dimension being kind of what I call the horizontal dimension, the workflow for long-read sequencing and probably a little bit of short-read sequencing, too, as we get into it. So acquisitions on sample prep, automation, we already covered DNA extraction, so I think we're in really good shape there, informatics, secondary and tertiary analysis, enabling that with our data. Those are things that we're interested in looking at. And then the second area is more of the platform level acquisitions, kind of what I call the vertical stack. And that -- I believe that in order to be successful, we have to create scale, we have to create durable growth, and we have to create defensible growth, in other words, having different technologies that enable to solve customer problems and allow us to grow. I feel very -- I'm thrilled that we were able to put the Omniome project together because I think that will drive us in many directions with tons of synergy. There perhaps could be other platforms that would be interesting for us. They would have to have a component of synergy, at least commercially, but more just as importantly, having some sort of R&D synergy. And then on top of that, it would have to have TAM to take us in new directions. And so we're interested in that. And perhaps we do some things like that. But where we are today, I want to make sure we execute really well on the projects that we've undertaken before we jump in and just kind of keep moving on. And so that's kind of how I think about the world at this moment right now.

Got it. Covered a lot of ground in 30 minutes, guys. So I appreciate the time this afternoon. And I hope you have a productive rest of the conference.

Yes. We appreciate the invitation. It's been lots of great meetings, so thank you for the time.

Thank you, Tejas.

Thank you.

Cheers.

Bye-bye.