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

So we're happy for our next -- to host our next panel here. We have Christian Henry, President and CEO of PacBio. It's definitely been an interesting day in the market for PacBio. So love to dig in and just maybe talk more about the story.

Sure, happy to. Thank you for the opportunity to be here.

So maybe just starting off kind of recently on the recent quarter. PacBio load his guidance last week when they reported 2Q earnings. Can you just kind of run through on what changed in your expectations from earlier in the year with the lower guide?

Yes. I think the biggest thing that we saw or we're seeing in the world is the impact of the broader macroeconomic conditions. And so as many of you know, we sell instrumentation that's high capital costs, and so things like interest rates and inflation are having an impact on the buying cycle. It's not that demand is changing, it's really just pushing out the buying cycle. In China, we see the continued impact from lockdowns. Now the lockdowns are kind of more spotty now than they were early in Q2. And so we're trying to account for that a little bit as we kind of move the guidance around, and then perhaps, the biggest area where we were -- where we see the business not being as strong as maybe we originally anticipated is in Europe, where a combination of things are really having an impact to extend the buying cycle. And that's foreign currency, that's inflation, that's recession fears. Unfortunately, the Ukraine situation probably plays into some of the psyche even though that we're in maybe a different space, but the whole mood of Europe has an impact. So what we tried to do is kind of evaluate all those different factors and look at the combination of the performance that we've had in the first half of the year, plus the kind of our expectations and that's how we derive the new guidance for the rest of the year.

Great. And then moving on to the broader long-read market landscape since we talked last year, PacBio made some improvements to the Sequel Systems. Your major competitor also made some improvements. Where do you think things stand today on just the broader long-read demand for the market?

Well, I think long reads continue to become or every day becoming -- it's becoming more clear that long reads are critical in germline-based applications more than ever before because we're demonstrating the high accuracy and the completeness of the genome really has an impact in kind of germline-based applications such as rare and undiagnosed disease, research, cardiovascular research, neurobiology and research in those areas. And when you look vis-a-vis our competition, we continue to demonstrate that we have the highest accuracy and most complete platform on the market. And I think that's actually continues to improve. In fact, in April, we launched an update to the Sequel IIe platform, and over the course of the quarter, we saw that as customers deployed the update, they are getting up to 30% more data per run than they were just in the prior quarter. And so we continue to make great investments in the Sequel IIe platform, and that's yielding a better workflow, lower input -- lower DNA input requirements, more yield per experiment, and also in the quarter, we also launched our ability to look at epigenetic profiles or methyl C calling on the instrument with the run. So now with every single run, our customers can look at this epigenetic status for no additional cost and consistent with no additional sample prep, no -- basically, you just get it and you get it for free. vis-a-vis the short-read sequencing world where in the short-read sequencing world, it requires multiple sample preps and basically, conversions that make it -- that really are not really ideal quite frankly. So we've made a lot of progress just in this last quarter, and I think we're all here to serve our customers.

And I guess, if you look at the competitive landscape between Oxford and Pacbio, is there much customer overlap, geographic overlap? Where do you see the competitive environment playing out?

Well, I do think there is a modest customer overlap. I mean, I think the ONT team has done a good job with their MinION platform at the low end of the market, which is an area where we don't really compete. And so -- but we've done a really good job at the high end of the market where kind of in the clinical -- when you're doing translational research, clinical research, you need that accuracy, you need that completeness and you need our service and consistency. And I think those things give us significant competitive advantages and allow us to grow, and we've demonstrated that. So there is modest overlap in the middle, but I would say, at the high end, I think we still are in a very, very strong position. And I do think they have a good business down at the low end. Geographically, I think the -- I think both companies do well in Asia Pacific. I think ONT is -- being based in Europe, I'm sure they have a strong business in Europe. And in the Americas, we have exceptionally strong business. In fact, our Americas business grew 50% year-over-year last quarter, and that's an indication of how much demand there is for long-read sequencing. And I think we're really at the beginning of a real exciting time for long reads and for sequencing in general.

So I guess that leads into the next question. So where does the long-read market go from here? Over the last few years, there has been some pretty impressive data outputs, multiple applications such as rare disease. What does it take to get payers on board or even more involved in the clinic?

Well, I think at the core, long reads give us the potential to make the genome more actionable. So today, estimates, people say roughly 6% to 8% of the genome is actionable today in a diagnostic or therapeutic type setting. Long reads allow you to see more of the genome and resolve more of the biology associated with the genome than the short read paradigms of the past. And so with that, one anticipates that we will be able to understand more of the genome, and therefore, increase the diagnostic capability or power actionability of the genome. And that will translate into greater value for the payers, but most importantly, it will drive greater diagnosis, a greater understanding of the causality of various diseases. And so that's why this is so important for us to drive higher throughput systems into the market, to drive better economics so that we can get the data sets required to demonstrate that actionability. And then from there, the payers will follow suit. So I think we're at the beginning of this, but my expectation over the next few years is, you're going to see a lot of exciting results. It's being one of the core strategies that I started with that when I joined the company was to do several collaborations to demonstrate the power of long-read sequencing or HiFi sequencing. PacBio sequencing, in particular, in rare and undiagnosed disease populations, and we're clearly with our partners seeing incredible benefits there. So the future bodes well for us.

And then I guess some of the short read players maybe expanded a little bit into the long-read market synthetically. Illumina have released info on their Infinity assay at AGBT, Element and Loop [indiscernible] Singular has their own synthetic long read. In your view, do you see this as actually entering into the long-read market? Or are these just maybe extending applications for short-read market?

Well, I mean, I still think it remains to be seen, but I do think that native long reads have some very profound advantages over short reads. Basically, short reads that are stitched together to create a long read, and it really starts at the fundamental core, right? When you have a small fragment of DNA that you're trying to sequence, the challenge is figuring out where you map that to the genome. And you have that issue whether you create a synthetic long read or not. So it will be interesting to see where these synthetic long reads fall short in terms of their ability to see all of the genome. And so from that perspective, not all long reads are alike. At AGBT, our competitors talked about the synthetic long reads, and it turns out at least from the data and things that we saw, the claims were different, and they were lowered from JPM. And it seems -- but I don't really want to spend time talking about that. I really want to spend time talking about the products that we have and our advantages. And the reality is, if you look at telomere-to-telomere consortium or the HPRC, the new reference genome that's been created, it's -- the foundation of those projects was PacBio Technology and HiFi sequencing, and that's because we can see telomere-to-telomere, where these synthetic technology is still going to be limited by the fundamental limitations. On top of that, of course, you also have multiple sample preps, which drives cost. And as we drive new products into the market, I would surmise that the synthetic long reads will actually be more expensive than native long reads.

That's great. And then I guess maybe that leads into the next question. So what are your customers looking for in advancements maybe on cost, throughput or accuracy, just on the Sequel II or IIe systems?

Can I just say, yes? The truth is, our customers are looking for us to continue to push the technology forward. And at the end of the day, the biggest area where I think improvement needs to happen is enablement of much higher throughput capabilities so that our customers can do large-scale experiments with thousands of samples and not just hundreds of samples. This is essential for us to build this market because having thousands and tens of thousands in multiple customers around the world doing these large-scale projects will enable new databases, new structural variant databases. Today, ClinVar is a common tool that people use to look at short-read single nucleotide variants, for example. We need the same types of capabilities for the long-read data type and whether it's structural variation, epigenetic profiling or just looking at being able to look at longer contigs of DNA. All of these things are essential for us to grow. So number one is driving the throughput up. I think accuracy is always a critical driver of this technology, and in fact, at PacBio, this is the hallmark of our differentiation, whether it's on the short-read sequencing using SBB chemistry where we believe we are roughly 15-fold more accurate than existing SBS methods or on the long-read side, where we clearly are the industry leader in terms of accuracy, increasing raw based accuracy, increasing consensus accuracy, those are foundational for us. And it's -- in fact, we talked about this partnership we have with Google earlier this year. One of the reasons for that is that we're using their tools, and we're working with them to improve the fundamental accuracy that will have 2 impacts. Of course, you'll need less coverage because you'll be more accurate, but that less coverage will mean less cost, more samples per run and just a better overall economics. So throughput, accuracy and then I think the economic equation is important. I continue to tell investors that we believe as we get new platforms to market, we will be in the sub-$1,000 genome category for long reads, and that will make us highly competitive with any other technology in the world, especially when you consider all of the value we provide with every sequencing run.

And so if you look at maybe on the topic of pricing, I would say that Ultima, said the $100 genome, I would assume that maybe that's where the real pricing goes to for the short read. Ultimately, where do you think long-read pricing needs to come down to then to be on par or comparable there?

Well, I think -- I do think that long reads can be priced higher than short reads because of the incremental value, and we will test the elasticity of that market as we get new platforms. But the reality is, long reads can't be so much more expensive that you can't deal with that value equation. And so I think in the -- as you reach towards the asymptote of zero, right? It's hard for companies to charge 0 for their products, then that delta isn't very far. And so the sub-thousand genome, I think, already gets you into that category. But I do wonder if -- I would be very surprised if ultimately, Ultima or others broadly have $100 genomes as their priced because I think it would be very -- in the clinical setting, I think it would mean that all of the value of the sequencing would be not very much. So -- but we'll see what happens.

Yes, TBD there. I guess maybe outside of price, what do you think would be also help accelerate adoption in long reads maybe in the next-generation box?

Well, I already kind of hit on the throughput and the throughput, I'm going to continue to hit on that because the throughput will drive the databases that help us understand the variation, which then can be used in clinical research and translational research settings. And so by far, that is the -- that's the most important aspect is generating that ubiquity. And then following it up with the right bioinformatic tools, that fully leverage the power of long reads. And that's why you saw earlier this year, we hired Mike Eberle, our Vice President of Computational Biology. He brought a team in, and their focus is on driving value through computational methods, leveraging the power of long reads and he's already doing amazing work in tandem repeats and other areas that are going to be clinically extremely relevant. And it's just a thrill to have he and his team in the PacBio family now.

And you touched briefly on partnerships earlier, but can we just maybe expand a little bit more broadly on partnerships? And any updates to some of the other existing partnerships such Mercy's Children?

Well, I think that one of the things that's really exciting is we continue to partner with the leading children's hospitals on rare and undiagnosed disease and driving -- continuing to prove that long reads give you better diagnostic, better insights into the diagnose -- potential diagnosis of these patients. Our partnership with Children's Mercy continues to bear lots of fruit in that area and they continue to grow and expand. But we've also partnered with other children's hospitals around the United States, and we're seeing the same kinds of results. And so it's really exciting. We did a project with Rady's in San Diego last year. That was very productive and successful. And so we see this as a great way to build the adoption of long reads and particularly, HiFi sequencing as an entree as we build -- as we move to higher throughput systems and then really deep market penetration.

And we touched a lot on long reads, but PacBio also has its own short read platform that it's launching. You presented some pretty interesting data at AGBT on your sequencing by binding platform. And you mentioned in-house testing at around 90% at Q40. Can you just touch a little bit on what kind of cohorts of customers are you looking at? And where have you seen the most interest so far, maybe academic research, clinical labs et cetera?

Well, I think -- I mean, I do think we did capture the imagination of researchers at AGBT. We've had incredible response to the data we showed and the product. We were fortunate enough to give a plenary talk, and we had -- it was well attended. And from that, we've identified many different leads, people that are going to be participating in the beta programs. And when you think about where the power of accuracy and SBB is really going to be used, and it's really in areas where customers are looking for needles in a haystack and/or customers that are concerned about the price per answer that they get. And this is a paradigm shift. Historically, in the sequencing market, everyone talks about cost per gigabase of sequence. Well, the reason why people have always talked about that is because most of the sequencing companies and sequencers had roughly the same accuracy give or take. And therefore, it was a common denominator that he could use to compare the economics. But as you get to -- as we've talked about 90-plus percent of the bases on our -- on the SBB platform, our over Q40 in terms of accuracy, then the basis of competition actually changes. It becomes the price per answer because what it says is that for less coverage, less sequencing, you can get to the same answer. People that will be interested in that will be all of the major clinical players that are engaged in oncology research or any kind of targeted sequencing research or clinical aspects customers that are interested in looking extremely deeply into -- looking for the rarest of the rare variants. We demonstrated in a collaboration with KeyGene recently that we could get 0.001% sensitivity, which is unprecedented. No one's ever done that before or demonstrated it. And so what that means is that for people that are looking at the rarest of the rare variants, you'll be able to do that or for customers that are considering -- they're running a business, let's say, they can do less sequencing and get the answers they need. So the price per answer will, in fact, be lower.

And I guess any thoughts on just color on pricing on the SR platform? And then how -- what's your plan to execute on maybe the rebranding of the message on the price per answer and any initial customer reception since then?

Well, I mean I think price per answer is not a very difficult concept to understand if you're running a business. And so I don't know how much actual rebranding we have to do, but we do have to convey that message and demonstrate amongst our peers that high accuracy does give you these kinds of benefits. We will be starting our beta program very soon, and we'll be launching commercially in the first half of the year. And the beautiful thing about where we sit today is that we have -- we already have a $150 million business where we're able to plug in our supply chain and our manufacturing and all of that synergy. And so what we're able to do is, we'll be able to launch at scale on a global basis on day 1 and serve the market, enable all of the customers as we move forward.

And then, I guess, just lastly, 2 months since AGBT, where have you seen the most interest or demand coming from customers since the meeting?

Well, it's so interesting. One of the strategies or thoughts that is always rumbling around in the back of my head is, how do we leverage the long read and the short read platform in bundled sales. And just since AGBT, there's been several -- I've been in -- I have a tendency to get involved in the bigger sales deals. I can't help myself, but I enjoy working with our customers. And into a conversation, the conversation steered, we start in the long read and spend time talking about long reads and then move into the short read conversation, and the opportunity to sell bundled arrangements or bundled deals where you buy long and short read really is catching fire and is a very interesting dynamic. And I think one of the reasons why is because they're both highly differentiated platforms. The other reason why is that they have different questions that they want to answer. And for the -- we will be the first company that can offer different kinds of solutions, different fundamental sequencing technologies to solve -- to enable us to ask the customer what's the question you're trying to solve and then we'll bring the technology to it rather than we have this technology, and we'll try to solve your problem with it. Maybe it will be okay, maybe it won't, et cetera. That makes any sense.