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

We'll kick off our next session. My name is Mike Ryskin, I'm on the life science tools and diagnostics team here at Bank of America, working with Derik De Bruin. And joining us for our next fireside chat is Christian Henry, President and CEO of PacBio. Christian, thanks for taking the time in being here.

Thank you. It's fun to be here in person. It's our first in-person conference, and it's been great. So, it's good to see everyone. Thank you for the time.

Absolutely, absolutely. So the format is going to be a fireside chat. If anyone's got any questions, feel free to throw up your hand and we'll call on and get you involved. But just to get the ball rolling, recently reported 1Q results, do you want to give us an overview of sort of what you thought were the key points.

Yes, so the first thing I want to say is I may make some forward-looking statements and so please refer to our SEC documentation, and I have now satisfied my legal team.

I think actually, the first one that's done that in this conference, which makes me worry about all the others, but... I was told to do it. I do what I'm told. First quarter was a great quarter for the company. And some of the key highlights were really -- I mean, probably the flagship highlight was our 18 unit sale to the Broad Institute. The Broad Institute, as we said on the call, is really a lighthouse account, a flagship account. It's an account that basically tells the world, tells the customer base that the PacBio technology is in a state that's ready to scale. We are already having follow-on discussions with other potential customers as a result of the deal. And so that was a really landmark opportunity for the company and really helps put us on the map. The rest of the business, we continue to make great progress against our new product milestones that we have coming on. As everyone knows, we made an acquisition of a company called Omniome last year, and we've announced publicly that we are going to launch the first product associated with that in the first half of '23. We continue to make good progress on that as well as our long-read opportunities. Another highlight basically in first quarter and early in the second quarter, we launched a very significant series of enhancements to the Sequel IIe platform, a long-read platform. And the -- kind of the key enhancement we made is the ability to call methylation signatures for methyl C, in natively inside of the software with each run. And so with one sample preparation, one sequencing run, now you can get all of the genomic information, including structural variations, single nucleotide variants and insert [ installations ] as well as now the methylation data. And this is really important. It's actually a watershed moment for the industry because what it does now is it enables researchers to start to uncover more of the biology and create more value in the genome. And that's really what long reads are all about. It's creating more value in the genome to inspire customers to drive for better resolution of the biology and then ultimately drive clinical applications, which will drive long-term growth. So those were a couple of key highlights. The other thing, I guess, I would be remiss if I didn't talk about the fact that we announced very publicly and said that our balance sheet is exceptionally strong. We had nearly $1 billion of capital on the balance sheet at the end of the quarter. And we believe that is the capital required to get us to being cash flow positive. And so we don't feel like we are going to need to access the capital markets before we become cash flow positive, which is obviously really important and it puts us in a very unique position relative to our competitors and other peers in the space. So there's a little bit to chew on. Great. No, there's a lot there. I want to start with the broad order just because you kind of kicked off on that. Can you give us any of how an order or a customer like that comes together, why 18 at once, why wasn't this a little bit more gradual? And can you talk about some of the programs, some of the applications that you will putting that to?

Sure. Well, the good news is that -- once I joined PacBio in the fall of 2020, we were able to build a new management team, and that management team has deep life science experience, and we all have very deep, long-standing relationships with the Broad Institute. And so in the fall of '21, we started talking about doing really big projects together. And it's because I do think the Broad Institute trusts our management team, they've seen the power of the technology. They had some instruments already, and so they understood how robust the instruments are and the information they're getting and the scientific community is asking for more and more long-read information. And so in the fall, we dreamed about some big projects. And in the first quarter, we were able to get the deal across the goal line. And some of the things they're going to be working on are whole genome sequencing at scale, which is really important to what we're trying to build as a company is trying to show the power of HiFi genomes or HiFi long-read genomes in the market and how you start to understand more biology, which creates more value of the genome. And so they're big believers in that. And I -- my belief is they're going to do thousands of whole genomes using their installed base. They've also been working on new ways to look at gene expression, looking at individual isoforms. And so looking at the whole transcriptome in a way no other technology can look at. And so they've developed a new technique, and we partnered with them on that technique such that they can look at all of the individual splice variants in the transcriptome and start to really develop the definitive gene expression assay. I suspect their community is going to be doing a lot of that work too. And that will filter from basic research all the way into clinical applications over time. So we're thrilled to be partnered with them. They're great to work with. We learn a ton from them. And so we're just -- we're watching that scale up. All 18 systems are installed and up and running. They have samples to get started. So I suspect they'll start scaling over the course of the second and third quarter.

And is there enough demand and enough appetite for something like this at other major genome centers [indiscernible].

Yes, that's a good point. I do think that there -- when you land -- when you put a dealer or a project like this together, others take -- other competitors take notice. And there are other genome centers in the United States and outside the United States that are peers of the Broad, and it's my expectation that some of them will scale up. It's always difficult to know how much they're going to scale up because there's lots of factors. There's samples. There's physical limitations like space and people. But we are in discussions with lots of different groups as a result of this opportunity that we are able to take advantage of.

Okay, great, and then just sort of one more question on the quarter and the near term. You maintained your full year guide. You had the big bolus of orders in 1Q. Can you talk us through the cadence through the rest of the year? So how should we expect that play out? And if there's anything that we should be paying attention to with respect to China, other macro upside downside risks?

So on the call, we did talk a lot about our guide for the quarter, or for the year. And we also talked about the cadence of growing sequentially from here and then the back half of the year being stronger than the front half. Some of the things that are -- have been working against us in the macro environment like China, will have a bigger -- we expect to have a bigger impact in Q2 than in Q1. And I believe we said on the call that we kind of modeled out our thinking around China starting to unlock on an exit basis kind of at the end of June. And so that's how we've thought about the modeling. If it's sooner than that, perhaps that's an opportunity, but it could be later than that as well. And I think it's -- we have -- we've built up our China organization. Over the last 6 months, we hired a General Manager of China or a country manager, who's doing a fantastic job, but it's giving us better information than we've ever had before. But as I'm sure many of the companies this week have said, it's highly volatile, and it really is difficult to predict specifically what's going to happen and how that will transpire. In the first quarter, we had -- in the rest of the world, our European business and even in our business in the Americas, our consumable revenues were lighter than we would have liked because of the COVID-19 pandemic. We saw a lot of -- a lot of systems and a lot of customers slow to get back to work, slow to kind of start new projects. And so as a result, some of our pull-through numbers that people calculate are lower than what they've historically been. We believe we will see an improvement in that over the course of the year. But it's probably unlikely that we're going to get back to levels that we had in Q3 and Q4 for a couple of fundamental reasons, and they are actually quite good reasons. The first reason is the fact that we have been obtaining many new customers every single quarter. And those new customer start-up times are much longer than we would have normally expected. In fact, a typical new customer in this industry probably has a 1- to 2-quarter kind of scale up. And what we're seeing is 2 to 3 quarters, partially because of the supply -- of supply chain problems in the sense, not from our perspective, but from ancillary equipment required to run a Sequel IIe system. And so the way we're trying to ameliorate that is to buy -- is to try to get some of those ancillary equipment, put them on our balance sheet and then be able to sell them at the time of a new customer. But I believe in the first quarter, roughly 1/3 of our placements, excuse me, were to new customers. We had a very -- a record number in the fourth quarter as well our very significant number in the fourth quarter. And so that's slowing down the pull-through. And ultimately we placed so many new systems last year and so many systems in the first quarter. I think we have around 442 instruments installed at the end of the first quarter that you're going to naturally start to see a bimodal distribution of consumables work its way through the system and which will ultimately likely bring down the consumable pull-through for box. However, at the name of the game here is to drive the installed base and drive the total revenue rather than the pull-through per box doesn't really pay the rent. It's the actual absolute revenues. And so we're -- one of our core strategies is to really drive that. So hopefully, that gives you a sense of how we're thinking about the world, how we're thinking about revenues unfolding over the course of the year and maybe some of the drivers for that. The last thing I would say, though, is that we have very -- we have significantly grown our sales force, and we made a key point of overinvesting in that. And we're really starting to see the productivity associated with that investment. In 2021 and in the early part of 2022, that sales force was really driving building the sales funnel such that we have named opportunities that are significantly more than our forecasted revenue for new instrument placements. The benefit of that is actually you have multiple shots on goal to achieve your revenue on instruments in any given quarter, and we wouldn't have had that without the sales force.

On the constrained was pull-through on the demand there. I mean it's a trend we're noticing with a number of companies not even directly competing here. So we're just always kicking out ideas of what could be driving this? Is there -- you mentioned some of the supply chain on the ancillary products and a ramp-up time. Is there almost like a different customer class where the ramp-up time, the learning curve is longer where maybe they're newer to sequencing, they don't have the backlog of samples, they're still sort of testing the waters a little bit, and it is a little bit of a more gradual ramp. Are you seeing anything like that?

Well, I do think there's some of that, particularly as we expand the Sequel IIe platform outside the United States. For example, this past quarter, we sold our first instrument to Israel. And there's nothing significant about that other than we haven't truly had a global presence. And as we build that global presence more, there'll be more expertise on the PacBio workflow, so to speak, and that will help the ramp. But I do think as you grow, the general trend is to penetrate the high-value customers first. And then as you work your way down the ladder, you have less experienced customers which take longer time to ramp. They're not as well funded. They may not have as much access to samples. And so that is a natural byproduct. And that's why I talked so much about driving the installed base and driving the total revenue, not necessarily the -- not necessarily the revenue metric per instrument because -- it is a metric that is a useful metric for everyone to kind of understand, but I don't necessarily think it tells the whole story.

So do you think that over time these new customers will get to the same level as your older cohorts? Or is it like you said, is it just Level 1, Tier 2, Tier 3, Tier 4?

I think absolutely, customers will continue to scale and grow. I've had the benefit of decades, and unfortunately you see the gray hair, decades of experience in DNA sequencing, and that's exactly been the case as the cutting-edge thought leaders develop applications and develop the technology and drive adoption early. And then you have the majority just like in any other classic market. And then you see the scaling at the smaller universities, the smaller core labs. And also the other thing is, us in continuing to drive our reach into those markets. The good news is that DNA sequencing is pretty ubiquitous today. And so we're not necessarily trailblazing new ground to put -- to find customers. We know where those customers are, but we definitely are trailblazing with the mission of long reads and how powerful they are, etc.

All right. I want to pivot to a little bit more on the innovation side of things and useful on that side. So AGBT is coming up relatively short order. What can we expect from you there? And what do you think we'll learn in general?

Well, I think one of the things we're going to focus on at AGBT, and I don't want to give away all the fun because I know that some of you might have the opportunity to do attend. But the real focus for us at AGBT this year is demonstrating the capabilities associated with the Omniome technology and why that's such an important technology. We acquired the company because we think it's a highly differentiated technology from all of the other short-read sequencing players in the market. And we actually think that differentiation is essential to develop any market share in that market because there are very strong competitors in that market. And so one of our objectives at AGBT is to continue to demonstrate with data why that's so compelling, why it's an interesting opportunity. I suspect we actually will have a talk with our team discussing -- discussing that data and showing where it's so powerful. And so that will be a primary emphasis. Of course, we'll be talking about long reads as well and how we're doing there. And so we're expecting -- it's going to be fantastic to be able to connect with customers. One of the things I'm getting a lot of feedback from our sales force just over the last 3 or 4 weeks is we're doing a global world tour, so to speak, well it's really Europe and -- Europe and the U.S., and reconnecting with our customers with kind of focus groups around -- and we've -- around the country. And we've had incredible response, incredible attendance, lots of new leads driving out that. There's something about being in-person that makes it a heck of a lot easier to sell and to overcome objections because these are expensive pieces of equipment. It's high technology. And it's just as much about the relationship as it is the technology itself. And one of our core values as a company is -- and I talk about this all the time, delight the customer because it's not about the technology, it's not about anything other than helping that customer achieve their goals. And I think companies tend to lose sight of that sometimes because it's hard, right? We're trying to create really incredible technologies at the cutting edge. We're trying to advance the state-of-the-art. We're trying to appease lots of different stakeholders. But at the end of the day, it really comes down to how -- what kind of relationships can you build with your customers? How can you help them solve their problems with your capabilities? And this [ renaissant ] so to speak, that's happening, now that we're all starting to get back together in a meaningful way is super impactful. And I think it's going to help the business dramatically.

Yes, well, help the customer anyway you can, that's essentially our fiber being on the sell side. So that resonates. The other topic we're expecting here more about at AGBT is we know some of your competitors are launching or planning to launch updated synthetic short reads, some medical long reads. So how do you anticipate having that conversation with customers? Sort of can you walk us through your rationale there and sort of what's your plan?

Well, I think it's not so much as a plan as it is pointing out how native long reads are just fundamentally different than any kind of synthetic short-read approach to trying to stitch together and create a long-read. And on our earnings call this quarter, we talked a little bit about that because obviously it was a very significant topic to investors in the first quarter. Our competitors, quite frankly, they're recognizing the power of long reads and how important they are and how -- and I believe they're also recognizing the impact where the new PacBio is having on the market and really capturing the imagination of customers. And so the way we approach the conversation is really talking about all of the benefits you get with native long reads, things like being able to look at all the structural variation, not just some of the structural variation. Being able to get methylation with every single run for free, for no extra cost, no extra workflow. Being able to have higher accuracy, looking at -- and looking at all aspects of the genome. So one of the challenges with short reads, it still starts with our synthetic. I call them short read stitched together, but whatever you want to call them. One of the challenges at a fundamental level is you're still starting with a short read that has limitations on what part of the genome you can look at. And so -- and this is actually something I really want to start to emphasize to folks is that the telomere-to-telomere consortium completed really the first ever genome, and that's really should be labeled as the gold genome -- gold standard genome. Any technology that can't sequence all of that is insufficient, it's just blatantly insufficient. And I think over the long run that will play itself out. And so attempts to kind of get longer, albeit, they might be useful in some applications for existing short-read customers, quite frankly are woefully deficient and will have -- will have a difficult time comparing -- being compared to native long reads. Now of course, the advantage we all have to acknowledge is that there's a large installed base of short reads in the market. And so the ability for those customers to try some longer read sequencing without a lot of investment is probably a useful thing. And at the end of the day, for us, we believe the long people -- the more people are looking at long reads and trying to understand the benefits, the more sales opportunity is for us to kind of directly compare the differences. And if you go, we do have some white papers that are kind of floating or starting to float around now. And I'm sure our teams -- there was a webinar, something or seminar earlier this week that our team is very thoughtfully responded to, and I'm sure they'll make -- they'll share that at the right time as well.

Okay. Any questions from the audience, Derik?

[indiscernible] diagnostic yield of long-read.

Yes. So Derik, it's a great question, and thank you for it. The -- we are seeing with some of our partners and one of the things we've done as a company is proactively gone out to collaborate so that we could show more and more samples of the benefits of getting long reads, i.e., higher diagnostic yield. And it's anywhere from -- anywhere from 15% to 50% increased yield. So it's all over the map. But what's really happened is there's never been enough long-read sequencing in the world at whole genome scale to define the definitive data sets required to do the analysis. And that's because, quite frankly, PacBio hasn't had -- PacBio systems haven't had the throughput and have been very costly to run. And therefore those databases haven't been completed yet. And so we really don't know definitively the impact of structural variation. We're only learning the basics and beginnings of epigenetic analysis and understanding that. And so you don't have -- you don't have all of the -- we don't have enough information and data sets to definitively prove that across all sample types. If you look at it today, I think roughly -- and this don't quote me on this, but roughly 8% of the genome is actionable, somewhere in that. So there's 92% that's not actionable. And short reads have been at this for quite a long time. And so there are -- our objective is to do 10s of thousands of whole genomes to develop the same kinds of data sets to develop the clin bar, so to speak, of long reads that will definitively drive that. Yes. So we -- one of the intriguing things about having 2 different technologies now, you can bundle them in different ways to create economic value for those customers. And the first -- the way we're going to actually approach both of the technologies is to start by asking the customer what are the questions you're trying to solve, what are the problems that you're looking at and evaluating. And rather than come with a one-size-fits-all solution, we can come with much more tailored solutions. And so I actually think that's going to be quite unique and quite powerful as we get these products to market. And there will be opportunities to bundle different kinds of systems together, hopefully connected together with consistent UIs and interfaces such that you can start to evaluate long and short read data together under 1 umbrella -- under the PacBio umbrella. And I actually think that's a powerful opportunity. If for nothing more, it gives you the opportunity to walk into so many different customer accounts. You can walk into basically any customer account in genomics and have credible conversations, which will ultimately lead to more sales. And I think that's part of this game and part of driving the actionability of the genome. The one other thing, Derik, I would say on this point and the topic is that having a long-read technology and short-read technology, both of which are highly differentiated, also allows us to target the short-read technology in the parts of the market where short-read technology has advantages over long-read technologies such as liquid biopsy, for example. And given the exquisite accuracy of the Omniome platform, it will make the price per answer dramatically less expensive than other ways of doing it today. And I think that's -- we're going to change the basis of competition. Today, we hear from all of the emerging short-read players to talk about price per gigabase. That as a metric is actually a really poor metric because if you have price per gigabit at poor accuracy, it's going to be more expensive. If you have very, very high accuracy, you don't need as many gigabases. And so the -- and this is really simple, right? It's really simple the way you should -- we should be thinking about it is how much does it cost to get an answer? And is that answer valuable? And how -- and can the customer leverage the cost benefit associated with that so that they can be successful in their own endeavor, whether that's a business or an academic project, etc. And so we're going to change the basis of competition to that because we believe our accuracy is so much higher than anything that exists today and anything that's been announced that's coming in the future. And as we get into next year and we launch these products, there's going to be a lot of fun to see how it all unfolds.

Okay, any other questions from the audience in the last couple of minutes. I guess I'll ask one more sort of tying it on to Derik's question. Your answer there is you're continuously making improvements in the Sequel II and you've got another next-gen long-read platform in the works. When you think about that and how it compares to the existing SBS chemistry out there, the short-read chemistry, what do you think the specs need to be to make it not just competitive but sort of win over a significant part of that market. You talked about the -- how you can play off accuracy of cost versus throughput, sort of what do you visualize as the "perfect" next-gen platform for you?

Well, on the long-read side, the perfect next generation platform is one that allows you to more resolve more biology than that was ever possible with a short-read sequencer. That has to be the first step and the second step. The third step of this is it has to have enough throughput so that you can get enough science done in a reasonable amount of time. And then the third is that naturally follows -- or the fourth, I guess, in my little set of analogies here. The fourth is really how do you drive the cost so that it's economical. And my belief is that we don't have to be -- you don't have to beat others on economics, but you have to beat everyone on value. And there's a trade-off there, and let's face it. In this room right now, that's not an empirical analysis that we can all easily kind of draw report cards. And we all like to create report cards and figure out where the positioning is. However, if you can improve the actionability of a genome, even just a little bit, that adds dramatically to the value proposition. Now there are some basic fundamental parameters that I think we all can get behind. The first is that we have to have throughput so you can do thousands of experiments per year or samples per year on one system. The second is you have to have kind of whole genome equivalent costs that are sub $1,000 in order to make that economic divide super compelling and very easy. And I'm very confident that with our next set of products, that's exactly where we're going to be. And so we are going to have more value given to the customer at great economics and an ability so that they can get incredible amounts of work done. And I think that's a really great combination for growth. And that's what we're trying to do as a company. We're trying to serve our customers, delight those customers so that we grow from -- last year we did $130 million to $1 billion of revenue and beyond. And we have to stay focused on our journey on how we -- how we competitively differentiate ourselves from others and just create a very high-value opportunity. And we're doing it, and it's a lot of fun.

Great. Thank you, Christian. And on that note, we're out of time. Thanks, everyone, and thank you again.

Cheers. Thank you.

Appreciate it.