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

Hey, everyone. Good afternoon. My name is Tejas Savant, and I'm the life science, tools and diagnostics analyst at Morgan Stanley. It's my pleasure this afternoon to host PacBio. And from the company, we have Christian Henry; and Susan Kim, CEO and CFO respectively. Thanks guys for doing this. Before we get started, I need to rattle off the disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep.

So Christian, maybe just to set the stage and kick things off for us, can you just walk us through 2022? Because I feel like, in a sense, the numbers didn't do justice to a lot of the stuff you had going on inside the company? And what are you most excited about as you look to 2023?

Sure. Well, first of all, Tejas, thank you, and thank you to the Morgan Stanley team for the opportunity. A lot of fun to be here. And just so everyone knows, my safe harbor, I may make some forward-looking statements. So please refer to our 10-K and our SEC filings. Now with that being said, '22 has been a real interesting year for us. It's been challenging on the economic front. We've had a lot of the headwinds that a lot of companies have spoken about I'm sure at the conference, but there has been a lot of encouraging wins for the company and development. We're in the process of developing new sequencing technology for the long read space as well as new technology for the short read space, and we've made a tremendous amount of progress on both of those platforms. We've also had some very significant customer wins. For example, the Broad Institute scaled up on our platform on the long read platform, our Sequel IIe earlier this year. And now they have I believe about 25 systems that are operating every single day and really starting to push the scale of the technology, which I think in the past, there was a lot of question about that, and they've been able to demonstrate that. That's had a knock-on effect with some of their peers to be scaling with the technology. And so we've seen that across the world quite frankly, both in the United States and a little bit in Europe, and in Japan, we have some very significant wins. One other comment as we start to look forward is that in -- when I -- today is the second anniversary of me joining the company. So that's interesting. I set out with a strategy and a vision to first build a commercial organization that could really have the scale to compete globally. Second, develop new technologies and new products that would enable lower cost sequencing, higher throughput, but better resolution than any other technology out there and we're well on our way to achieving that. With that scale, we will be able to launch new products into the market on a global basis where many of our competitors don't really have that capability. And so we see, on one hand, very high product differentiation from some of the large competitors. And on the other hand, significant scale vis-a-vis the smaller competitors, which puts us in a really good spot to grow as we move into 2023.

Got it. That's actually a great setup. Starting with the long read side of things, clearly, you've had very strong adoption for de novo assembly work. How important is sequencing in the entirety of the genome, like it was done with the Telomere-to-Telomere project? Could you just provide some feedback from customers and what that milestone represents and whether there are other such projects underway?

Yes. So I think, Tejas, what we're seeing is that people understand that now for the first time we can see the whole genome with full resolution. And if you think about the actionability of the genome from all of the next-generation sequencing that's been done to date, it's still a very, very small percentage of the whole genome, which means there's a lot of information that existing technologies can't reach. And so if you look at our long read sequencing capability, we're able for the first time to see the entire genome. And that has implications in a number of different potential clinical markets. For example, looking at the complete HLA region gives you interesting insights where short read sequencing can't, looking at tandem repeats, very long stretches of repeats. These are regions of the genome that are very difficult for short read sequencing, if not impossible, to sequence. And then there's what are termed dark regions of the genome. And those dark regions are unsequenceable by short read technologies. Therefore, as a result, discoveries and insights associated with the importance of that biology have never been discovered. And so we're right at the cusp of starting a new era of scaled biology using long read sequencing to uncover those insights. So Telomere-to-Telomere was important to set the stage of, hey, we can do the whole genome. The HPRC consortium just came out with a new reference, a pangenome reference, which enables us to start to use a new reference that encompasses the whole genome and not just the past references which have been quite frankly incomplete. And so the combination of those start to put customers in the position where they want to look at larger and larger cohorts of whole genomes to uncover those insights, resolve the biology and hopefully push the field forward, both in a clinical context, in an agricultural context, in a genomics conservation context, understanding the genealogy behind genomics. And so we're really at the beginning of an entirely new era of understanding of the genome.

Got it. So strong key, Christian, one of the limitations for long read has been throughput relative to short read systems. You've got some work underway for an ultra-high throughput system. But even before we get there in the more near-term, you've talked about a next-gen version of the instrument, which will have better throughput. Can you just walk us through what remains to be done in terms of development? Are there any sort of theoretical limitations eventually that investors need to be sort of thinking about in terms of how high you could go along with the Invitae announcement, initially, you had talked about 100,000 sort of like genomes, your very high numbers. So just curious as to how that development tops for you?

So we do have a lot of core technology into development. And it's not -- it's typically -- we don't typically talk about new products before they're ready to go. But some of the fundamental aspects of the core technology that we've been working on are driving the costs down and increasing the throughput of the system. And also, quite frankly, increasing the simplicity and ease of use to enable more samples to get on the market. Over the last couple of years, you've seen the company launch enhancements to the Sequel IIe platform that have reduced the sample input requirements, simplified the workflow, increased the compute capabilities, and all of this has led to more and more sequencing. But as you point out rightfully, relative to short read sequencing our long read capabilities in terms of doing tens of thousands of genomes a year at a modest size lab are quite limited. And so we'll be working aggressively on that. At the core of our architecture is a CMOS sensor. And we're using technology from the semiconductor that's been around for decades. And so what we're doing is, as we develop new products, we're leveraging the -- all of the semiconductor improvements to increase the density of the product so we can look at more molecules simultaneously. You have to remember, we are a single molecule sequencer where all of the short read sequencers they do not look at single molecules, they look at groups of molecules to try to get the resolution. So our system is extremely sensitive, which gives us the ability to see single molecules. We're developing ways in which to pack more of those molecules per square millimeter of surface, which will give us more throughput, lower cost. And as I've spoken about, our belief and continue to believe strongly, we will be able to launch products that have thousands of genome capabilities in a modest-sized lab and costs at well under $1,000 a genome and continuing to make that push, so to speak, kind of along the lines of Moore's Law. So we've made a lot of progress. We're integrating these technologies to create new systems and configurations. And we are -- when they get ready for prime time, we'll be sure to share that with the world.

Got it. You've talked -- I mean, look, like HiFi read definitely provide greater diagnostic yield versus short reads. And as you just mentioned, Christian, you talked about a sub $1,000 genome in the relatively near-term here. If, let's say, throughput tripled versus the Sequel IIe, can you paint us a picture of that price point on a per genome basis with, let's say, 3x the throughput versus the IIe? What sorts of used cases does that instrument profile unlock for you?

Well, I think that lower costs and more throughput unlock a myriad of different applications. So let's start at large scale cohorts. It will allow scientists and researchers to conceptualize and execute on whole genome scale projects of 10,000, 100,000 kind of level of scale. And why is that important? There are not a lot of long read genomes truly out in the world today in databases that really help us resolve the insight of what's going on between the codons, what's going on between -- in the telomeres or in all of the areas of the structural variation or the epigenetic profiling. As we drive the scale of the sequencing up, the larger cohorts can get done and we could start to understand fully phased genomes with the epigenetic modifications. What does that mean? How does it impact -- how does that impact disease? How does it impact our understanding. So that's the first area. The second area is, as we drive scale up, we can also look at even larger cohorts as we start to get into targeted sequencing. So working with partners like Twist to develop targeted panels that focus on the regions of the genome that short reads can't see. That will fundamentally enable much, much larger sample sizes so that we can statistically understand what's going on with the biology. And then finally, in the world of gene expression, today, the content paradigm is really generally about bulk gene expression. And we are developing capabilities and technologies such that you can look at individual splice variance, but not just one splice in time, the entire transcriptome, all of the splice variants in one assay at the same time giving the ability to understand both the identification of those transcripts and the quantification, which starts to become, quite frankly, in my opinion, the ultimate gene expression assay. And really the promise of what -- I started my journey in life sciences with Affymetrix back in the 90s, that's how old I am. But -- and that's where gene expression really got started at scale. And to see it come to this point now where we can look at whole transcriptome, all the supplies variants and relate that to gene expression is truly remarkable. So those are 3 areas, for example, that new scale will work for us.

Got it. One on the competitive landscape question, Oxford Nanopore has come a long way in terms of its accuracy, are you starting to run into them more these days? And if not, why not? And then as a follow-up to that, you've got a bunch of synthetic long reads entering the market. Illumina has got one, Element and Singular also have works in progress there. What applications do you think synthetic long read could come in and sort of replace native long reads, if any?

Well, from -- now obviously, we're a little bit biased. But if you really look at it from a scientific perspective, the challenge of synthetic long reads is there's still short reads that can't reach fundamental aspects of the genome. So they can't reach the whole genome. They lose resolution because as a short read technology, you have to fragment the DNA into small pieces in order to -- and then restitch them back together. So you lose -- you actually do lose some resolution there. So when I look at the -- and then there's the cost aspect, the cost of its synthetic long reads is going to be -- is much more expensive than native long reads. And so you have less resolution. You can't see what you want to see in all of the genome and it's a lot more expensive. And so as a practical matter, having a significant impact on the long read technologies and looking at native DNA in the market, I don't expect it to be a very significant contributor. Now it's true that the short read sequencers are ubiquitous in the market today. And therefore, it's likely some customers are going to want to try this to see how their long read paradigms, synthetic long read paradigm works. I actually see that as a market opportunity for us as they try these things and then they see the power of native long reads, I think it creates market opportunity rather than really competitive dynamic out for us.

Got it. You released your first kitted solution this year for COVID. Do you have plans to release other kits? And what are your -- some of your key learnings from that exercise?

Yes. I think the first thing is, one of the important aspects of launching the COVID kit for us, even though we launched it a bit later in the cycle of COVID, was to develop the capability and muscle internally so that we could rapidly deploy kits and applications. This is a skill that had to be learned from more simplifying the workflows, understanding the mechanics of manufacturer pricing, and quite frankly, the demand -- what are the demand curves look like. So we learned a ton about that in this process. And now we're developing kits -- for example, this transcriptome, I'm talking about MAS-Iso-Seq. We'll launch that kit a little bit later this year. And that will be really a great thing for our customers because it's a simple plug and play assay. And today, there are some written protocols out there, but this will simplify everything. Everything you need in one kit with as few tubes as possible to do the sequencing. So yes, we did learn a lot. We've got our next kits coming. And I think it's the beginning of a new paradigm for PacBio because PacBio has principally been focused on sequencing technology and not as much applications. And one of the things I've brought is this concept of really trying to think of the end-to-end workflow from sample preparation, i.e., the kits around that to the sequencing workflow to ultimately the bioinformatics. And so for example, we hired Mike Everly in our computational -- as Vice President of Computational Biology earlier this year. And he brought a team with him. And he's developing all kinds of great algorithms that are going to be used as we develop new sequencers and looking at complicated to sequence regions and greatly simplifying the workflow for everyone.

Got it. I want to switch to the short read side of things and Omniome here. Look, it's an increasingly crowded space among bench tops. Potentially, we could hear something from Illumina in terms of Chemistry X coming to the new NextSeq, et cetera, at their launch event coming up. How do you see Omniome being positioned in that sort of segment of the market? And I think you've -- at AGBT, you emphasized accuracy and sensitivity and talking about customers looking at this from a price per insight perspective versus just a price point. Walk us through why you think that's a fair way to look at things? And are customers starting to resonate around that messaging?

Yes. So we acquired Omniome in 2021 with the -- because we saw the technology is fundamentally differentiated from Illumina and the leaders in the market and from other competitors. That differentiation is what's key. Because when you have a large player in the market, the way to create a beachhead and develop a business is around having significant differentiation. That differentiation is along the lines of accuracy. What accuracy does for you, it decreases the amount of coverage you need to get to have confidence in your answer. By decreasing the level of coverage required, you effectively can decrease the cost or you can look even deeper for insights that weren't possible with the existing technologies. And so the Omniome platform promises to give researchers a much better choice, much more flexibility about how they deploy the system, looking for the rarest of the rare variants or saving money for looking at kind of what the status quo is. And so the reason why I started to talk about the notion of price per insight or price per answer is that the traditional ways of looking at price per gigabase or how much sequencing doesn't factor in the thing -- the whole notion that you don't need the sequence as much to see the answers you want to see. And so the technology wouldn't get that benefit. At AGBT, we shared some collaborations that we've been doing with the TGen to show how accurate the technology is and how sensitive the technology is. And quite frankly, to my knowledge, the data we showed is the most sensitive sequencing data that's ever been shown before, quite frankly. Now that's my perspective. But if you actually look at the data, we got a lot of interest coming out of AGBT. And what's so intriguing for me is the application set that we're going after with Omniome, the Omniome technology is complementary to the application set that we're going after with our long read sequencer. And we're having customers come to us already to want quotes to combine and bundle the technologies because they realize what we're going to bring to the table is not one size fits all. Here's a sequencer and we want you to try to fit your research into what we can do. It's the ability for us to ask our customers what's the question you're trying to solve. Let's talk about what are the technology options that help you solve the problem. Let's give you the economic incentives so that you can bundle the best-of-breed technologies together. And I think that puts us in a unique position vis-a-vis all of the emerging short read sequencing players. They can't offer a long read sequence. They don't have one. And also even against the larger player in the sense that we also have not only is the short read sequencing technology very, very unique in terms of its capability, but once again, we can integrate it with the long read sequencing in a bundle and then eventually create entirely new products between the technologies.

A quick follow-up there. Is the beta launch now live? And what can we expect at ASHG on the Omniome front?

Well, the beta launch is not live yet. And as we've talked about, we wanted to start running beta, give or take, late September, early October. So we're not far. It's coming, but it's not live yet. We -- at ASHG, we plan to talk more about the system, its benefits, its data, we'll give a product development update on where we are. We've committed to the world that we intend to launch to start shipping the sequencer at scale, I want to be very clear about that, at scale in the first half of next year. I believe we're still absolutely on track for that. And the team has been working really hard and the data is really exciting. So we're excited to be -- we know it's a crowded market, but we're excited to be getting into the market with a fundamentally differentiated offering and with the ability to launch at scale to really help our customers see things they can never see before.

Sticking with the ASHG theme, Christian, you've got the conference and then you've got your Analyst Day coming up right off of that. And so the inevitable question is, do we see a new version of the Sequel debut at ASHG? How are you thinking about the hardware part of it coupled with -- obviously, there will be workflow announcements like you usually announce at the conference and you just spoke about Omniome?

I think, look, from my perspective, it's really important that we launch products when we have confidence of when we can ship at scale. I want to re-emphasise. The reason why I'm emphasizing that so much, it doesn't do anyone [indiscernible] good if I can ship one sequencer a quarter or it's delayed by 6 months. I mean, it's not really -- we're trying to serve our customers. And so what my intent is, is for us to make the systems develop them. And when they're ready to go, we announced them. And when we have definitive dates on when we know when we believe with conviction we're going to ship, that's when we would start talking about them. So stay tuned.

I want to pull in, Susan, you're on some of the macro crosscurrents that you guys are navigating. You've called out impacts in EMEA from longer purchasing cycles, FX as well as competition and some stopping shortages at large customers, et cetera. Help us sort of think through perhaps a pecking order of what's the biggest driver of some of the headwinds you're seeing? And have any of these gotten worse since the second quarter?

So the macro environment is still -- the biggest impact of the macro environment has been lengthening the purchasing cycle with respect to conversations with customers. That's still the case. I would say nothing has materially shifted in Q3 relative to what we had announced at the end of Q2. So the macro environment, certainly inflationary concerns, certainly international FX, all of that has had an impact in terms of lengthening that purchasing cycle. And so it makes the predictability of the capital timing of when that comes in harder because of that. So that's still the case. I think on the flip side, when you look at -- certainly, China lockdowns are not as pervasive as it used to be. So we are dealing still with some intermittent lockdowns kind of within a block or within a building that can have an impact, but the pervasive kind of countrywide impact has relaxed. So that is helping in terms of some backlog of projects to get some consumable pull-through through and start to help get some consumable orders in. We actually had in fact a relatively stronger July, so month one for the quarter relative to what we saw in kind of the first half of the year, which is encouraging. So still the macro backdrop is there. It is still choppy. But one of the things that's still very exciting is we're having lots of conversations with customers. Customers are still very excited about our technology. So all of that is still there, which is very encouraging.

So I mean, it's encouraging to hear that the lockdowns in Chengdu, Shenzhen, et cetera, haven't sort of made the China headwind worse for you. One follow-up on the Americas side of things and that customer purchase delay dynamic. I think you talked about customers taking longer to evaluate other platforms given the launches we've had here. But most of those -- I mean, all of those platforms have been on the short read side of things. So does this standpoint to -- sort of the complementarity between short read and long read being replaced in a sense by people viewing essentially a sequencer as a sequencer versus bifurcating the market? I mean, the question is basically, why would a long read platform see delays because there's more short reads on the market?

Well, I think the reality is this is all about dollars and cents. It's not about complementarity. And we've seen this as far back as 2007, '08, '09, '10 through today that whenever a new sequencer or a new shiny object comes to the market, people have a budget and they want to evaluate what's the next thing to do, whether that's long read, short read, proteomics, mass, whatever, it could be -- it's really the totality. And we are in a very fruitful environment right now with all of these great things coming to market. And so I do think that that -- customers are always trying to figure out what is the best use of the dollars I have, not necessarily, I don't want to do short read anymore or I don't want to do long read anymore, any of those things. It's much more about how budgets. And quite frankly, it's not the customer or end user. It's also the purchasing department, right? The purchasing department is making allocation decisions across the entire whether it's the floor, the institution, the government. And so there's all of those different factors at play. And as Susan pointed out, some of the macro stuff really isn't happening. There's incredible amounts of demand at the sequencing level. It's at the purchasing level how are people -- how fast are people moving. I do think some purchasing groups have a tendency to just slow down a little bit because, hey, you know what, there is some uncertainty. We still have the funding. We want to hold on our funding because we don't know what -- we might have the funding for this, but we don't know maybe if funding for that or whatever down the road may or may not come. So that's -- all of that is intertwined. But the core demand for long read sequencing is growing leaps and bounds based on the number of publications, the conversations. The fact that we actually put a commercial organization in place so we could have these conversations, that's really helping us drive as well.

I'll squeeze in one final question. Susan, we talked about a lot of these macro crosscurrents here. Potentially, we could have a new sequel instrument as well in place. So as you look to 2023, do you feel sort of relatively comfortable underwriting high-single-digit growth in placements and high-single-digit growth on the consumable side, at a minimum with Omniome or any contributions from Omniome representing upside to those numbers?

Well, we're not going to talk about 2023 in this forum, but we are very excited about our Analyst Day that's coming up on November 15 where we will share a lot about our technologies. We'll share about our -- how we think about our long-term model. And share more of those details with everyone at that point in time.

So do you think you'll be in a position to guide to '23 at the Analyst Day or is that TBD?

I would say that's still TBD, whether it's a framework or a guidance. But certainly, at some point, we will -- at the right time, we'll give guidance.

And just so everybody knows, the Analyst Day will be in New York. It's the first one we've done in the history of the company. So we're pretty excited about it because for the first time we will start to unpack kind of how we think about the financial -- our financial future and what does it mean and start to set some milestones and guidepost for folks, which is -- I love it. I'm very excited about it.

For a second there I thought you were going to say unpack the new sequel.

I'll let you run the first run with that.

Thank you. Thank you guys both for joining me this afternoon. It's been a pleasure.

Thank you.

Thank you very much. Thank you to everyone.