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

All right. Let's get started. Welcome to day 3 afternoon of the JPMorgan Healthcare Conference. I'm Julia Qin, lead analyst covering life science, tools and diagnostics at JPMorgan. And it's my great pleasure to introduce you to our next company presentation by PacBio. And with that, let me turn it over to Christian.

All right. Thank you. Thank you, Julie, and thank you, JPMorgan, for hosting us. It's so great to see so many of you out in the audience, friends, for the first in-person JPM in a long time and my first as the CEO of PacBio. And so today, I've got a lot to share with you, so I'll try to go quickly. But first, I'll start with the obligatory forward-looking statements, and there will be a test after. I had to keep it to one page. But please refer to our public filings if you have more information and more questions. And with that, the mission of PacBio is really focused on enabling the promise of genomics for bettering human health. And we started, as I joined as the CEO, with putting this new mission in place a new set of values and a new set of strategies. And these strategies are starting to bear fruit as we'll talk about today. So today, the key takeaways in my presentation are really that we believe we have the products now to accelerate our growth. Revio, our new and transformative long-read sequencing platform, completely exceeded our order expectations with 76 units ordered in the 8 weeks between the announcement and the year-end. Onso, our highly accurate short-read sequencing system, is receiving great feedback in our beta program. We started the beta program in mid-November, and we have several customers running samples today, and I'll tell you a little bit more about that in a few minutes. Finally, we also have customers and ecosystem partners now working together across a whole range of applications to enable broader adoption, and that's a core focus of our strategies. And finally, we have a strong balance sheet. We continue to believe that we have the capital required to drive us to cash flow positive during 2026. And so let's get straight into it. Who is PacBio? PacBio is a sequencing company that's historically focused on long-read technologies. We have over 770 employees, 230 that are sitting in commercial. And this has been a really important part of our strategy to drive the adoption of long-read sequencing and prepare us for launching a product like Revio. We sell instrumentation and reagents. Our business model is a razor-razorblade type business model, and we also have the software and informatics to interpret the biology. We're focused on 2 different core technologies for DNA sequencing. The first is what we call smart sequencing, and that single molecule real-time sequencing. We use semiconductor technology to be able to look at individual long single molecules of DNA. And this -- there's a schematic at the bottom of this chart that shows our PacBio HiFi reads is what we call them, gives us read lengths of 15 to 20 kilobases compared to short-read sequencing methodologies that are in the 150 to 200 base pair read links. However, in 2021, we acquired a company called Omniome with a short-read sequencing technology that we believe will be important in specific parts of the market, and we'll talk about that in a moment. And this technology we call sequencing by binding, or SBB. And the point of this technology is that we're able to control the reaction conditions of both the incorporation event and the interrogation event. And so as a result, we're able to drive exquisite accuracy. In fact, we believe SBB is the highest accuracy sequencing technology that's ever been invented. We use these technologies in combination with each other to serve the entirety of the sequencing market from complex disease research, plant and animal sciences on the long-read side of the spectrum to therapy selection and noninvasive prenatal testing and cancer recurrence monitoring with our short-read technologies. And we believe this differentiates us from everyone else in the sequencing universe because our technologies are geared towards specific applications rather than having one instrument or one technology trying to fit into all the different applications. And this allows us to have a different kind of conversation with our customers. Speaking of customers, we do serve an extremely large market. Today, we believe the market is roughly $7 billion, and we think it's growing quite rapidly, and we expect it to be around $14 billion by 2026. The composition of the market, you can see in the chart, with human genomics leading the way along with oncology. So the human side of the market, roughly $10 billion over time. But also our long-read technologies, in particular, serve plant and animal, microbial and other emerging markets, which adds up to a multibillion-dollar market opportunity for the company. So let's take a moment and talk about 2022 and what our strategic priorities were going into 2022. The first was really executing on our business model, leveraging the commercial investments that we made in 2021 to drive increased utilization of HiFi and increased adoption of the Sequel IIe platform, our former flagship long-read sequencing platform. Our second core strategy was focusing on delighting our customers and driving the adoption of HiFi sequencing into the marketplace, helping our customers and helping the world understand the power of HiFi through various collaborations showing the increased resolution of long reads enabling better diagnosis, better understanding of the genome. And finally, and perhaps most importantly, driving our product development pipeline forward. During 2022, we were focused with the task of trying to develop 2 new sequencing technologies, 2 new sequencing platforms. Very few companies in our industry have ever developed multiple instruments at the same time with completely different technologies. And so we definitely put a big task in front of us. But we'll step back for a moment and talk about the numbers because I know many of you, this is an important aspect of who we are and what we do. Our preliminary revenues for 2022 was -- were $128 million. This was lower than we expected and partially because in October, we launched the Revio system, which basically subsumed much of the demand for the Sequel IIe platform and therefore, our instrument revenue in the fourth quarter was much lower than we expected. However, if you look at the consumable side of the business, we had record consumable -- record consumable revenues for the year about $60 million, and this is significant growth over 2021. And we felt that this was a really important metric for us to show that the demand for HiFi and long-read sequencing is continuing to grow at a very nice pace. We ended the year with over 500 Sequel IIe systems in the market. This installed base was a really important number to us because it gives us the initial bolus of customers to go after with our new Revio platform, and we'll talk about that in a minute. And of course, as I said at the beginning of our presentation, we ended the year with $772 million in cash, which gives us a very strong balance sheet to execute on all of our strategies to grow this business. Diving a little bit deeper into the success of 2022. We grew our installed base 37%. And in fact, Sequel IIe is the most successful platform in PacBio's history. You can see the lines showing peak installed base of the prior generations of technology. And we're pleased to report that the Sequel IIe platform, we currently have 512 systems in the market. We grew our SMRT Cell, and this is the core unit of consumable by 24% in 2022. And you can see we've had strong and steady growth over the last several years as more and more customers are adopting HiFi technology. And finally, and perhaps most importantly here on this slide is that we had a 68% growth in data generated from the Sequel IIe platform. This is actually perhaps the most important metric on this chart but one of the most important metrics in my talk, in the sense that there has never been enough long-read data out in the world to show the power and show what's going on in outside the regions that short reads can't sequence. And with 68% growth, you see our customers are responding appropriately. The second area of focus for us was collaborating with more and more customers to drive the power of HiFi, to show how in rare and undiagnosed disease that clinicians can use HiFi technology in our long-read sequencing to more deeply understand what's going on in a rare and undiagnosed disease case. We announced just this week a new bioinformatics collaboration with the University of Tokyo because now, as we see more and more long-read data getting into the market, we need better and more tools in secondary and tertiary analysis. And as we move forward in 2023, not only are we going to focus on launching our Revio and Onso platform, but we're really going to be focusing on the informatics side of the equation so that everyone can get the most value out of their sequence data possible. We also have focused a lot in front of developing Revio in our entirety in the workflow itself. In fact, we expanded our relationships, and we expanded the number of applications that can be used on our sequencer. If many of you recall, in 2021, we launched our first ever kitted application, our HiFiViral kit. Well, that was just the beginning of us developing our capability to launch new kits into the market. And in November, we developed and launched our MAS Iso-Seq kit, which allows complete isoform analysis for the first time actually in the industry. We also partnered with Twist on developing targeted sequencing panels. We developed new callers or new bioinformatic tools to allow people to understand tandem repeats and effectively really start to leverage the power of the long-read data. We also focused on the front end of the workflow because we knew, as we launched new technology with higher levels of throughput, we would need greater levels of automation on the front end. We needed to simplify our sample prep. And so first, we collaborated with Corteva to develop automated ways of processing and preparing the long-read sample for sequencing. We started working on high-throughput setups as part of the continuation of our partnership that we had starting in 2021 with Invitae but developing the core tools and capabilities to allow us to operate in a high throughput manner. We significantly lowered the DNA throughput over the course of the year. And of course, we launched the MAS Iso-Seq system. So those 2 advances allowed us to improve the usability and the access to more and more samples in the market because as we launch Revio with much higher throughput, we need to make sure that there's plenty of samples to come on to those systems. On the short read side, with Onso, we created a conversion -- the first thing we did was we ended up creating a conversion kit so that now all of the libraries that exist in the world on other short-read platforms are compatible with the Onso system. And this will allow our customers as we start to ship Onso to basically have plug-and-play capabilities with respect to their workflow. And of course, through the year, at the various conferences, we continued to show how accurate the Onso system is. And in fact, we're seeing robust Q40 plus accuracy, which no other commercial platform has, quite frankly, ever seen before. So we're very excited about the implications of that. So we got a lot done in 2022. Now I'd like to just talk a little bit about our PacBio compatible program. We created this program to really provide our customers with a portfolio of technologies and capabilities that they can have confidence, work very well with HiFi sequencing and with SBB chemistry. And you can see a list of the names here. And we're launching this formerly under the PacBio compatible name this week, and we're working with all kinds of different collaborators and other parties to make their technologies compatible with long-read sequencing, HiFi and with SBB. And so we're really excited about this. And you can see these are the leaders in automation, in single cell, in informatics really across the entire workflow. So now let's talk a little bit about Revio. As many of you already know, we were able to achieve 76 units of bookings in the fourth quarter. And the reason for that is Revio is absolutely a revolutionary platform. It has the scale, starting with our 25 M ZMW as the primary unit of sequencing in the instrument. We combine 4 25 M smart cells in each run to allow our customers to interrogate up to 100 million single molecules simultaneously. These stages are 4 independent stages, so they allow our customers to run, for example, an experiment with a tumor, a normal, a gene expression experiment and then have an extra flow cell if they want to do another -- perhaps a deeper look at the tumor. The system is 50% easier to use, 50% easier to use in terms of reduced consumables. We're able to load the system in advance. So the run time has been reduced to 24 hours, and you can actually now run the system 24 hours a day, 7 days a week because you always can be loading the next run while the current run is going. This gives us more throughput and simplifies the workflow in the lab. We also improved the compute significantly, a twenty-fold improvement in relative compute power. We've created an entirely new architecture using GPUs, and this will allow us to even extend the technology further in terms of throughput into the future. And then we've had a very, very successful collaboration with Google to fundamentally improve the accuracy of each base call and the ability to call bases, and that's actually integrated on the system itself. And so you don't have to take any of the data off the system to make the calls. It's also the most affordable system we've ever had. It is the first sub-1,000 long-read genome. It's less than a minute to load. The file sizes are significantly decreased. And importantly, there's no nitrogen requirements, whereas the Sequel IIe requires nitrogen alongside the instrument to keep the environment stable. We've been able to innovate around that. And now it's really plug and play. You wheel it into the laboratory, you plug it in and you turn it on and start sequencing. And all of this gives us the capacity to sequence 1,300 genomes a year at 30x coverage, which is fifteen-fold more powerful than the Sequel IIe. The internal development is wrapping up at this point. We're in the final verification stages. We're seeing very robust performance. Here, you can see some of the high-level data from the last 45 runs or so. We're averaging per run over 370 gigabases at this point. The base quality, 93% of the bases are over Q30. So it's a highly accurate machine. And in fact, some of our customers who have run samples internally are seeing the best sequencing data they've ever seen, at least for MAS with respect to some of their more complicated genomes. We're doing this across a variety of genomes too. This isn't just human-focused. And so we're seeing it in plants and in other mammals and, of course, in humans. So how is Revio doing from a customer perspective? As I said, 76 orders in the fourth quarter. Those orders came from 13 countries across all regions of the world. We had 43 unique customers by the system during the quarter. And this has been a big question mark by many investors, for sure is, well, did you just sell the instrument to all of your multiunit orders, and that's how you arrived at 76. The reality is this was broad across our entire installed base with some of our larger customers, of course, having multiunit orders, as we talked about at our Investor Day. But I'm really quite pleased with the 43 customers for the 76 revenues -- or Revios. And perhaps even more interesting is the fact that 30% of our new pipeline is new customers. And that's essential for our growth is driving those new customers to long-read sequencing so that we can make long-read sequencing ubiquitous in the market. The doughnut of course, shows that there's a complete diversity of customers that are buying Revio. Everyone from, of course, the human genomics crowd, but plant and animal, microbial groups, the emerging technologies like AAV, for example, and of course, oncology. And so we had a very diverse set of customers, served many, many customers and, of course, a great number of systems, which we will start shipping in just a few weeks. Part of the power of Revio is it gives us the ability to drive into population scale sequencing. And I'd like to tell you about one of the projects that we recently won with MBRU in Dubai. This is a university that wants to do a multi-thousand sample experiment with population sequencing. They ordered several Revio's and some Sequel IIes just to get started. And this group will -- we won this deal against all other sequencing competitors. So we're the sole provider of sequencing technology here. And we wouldn't have been able to do that without Revio. And we see this as the beginning of our ability to take more and more samples in population scale type programs as Revio gets up to speed. Now just for a second on Onso because I don't want to forget about that. We expect to start shipping Onso in the second quarter. Onso is our short-read sequencing platform with the hallmark accuracy that we've talked a little bit about. The system itself, we expect a launch with 400 million to 500 million reads with 200 and 300 cycle kits and conversion kits, as I talked about, for other kinds of libraries. The beta program is going quite well, and we have customers like the Broad and Corteva, doing -- running experiments. We're getting feedback. We're incorporating that into our development but you're seeing the high accuracy that we've been touting at the customer sites. We expect to sell the product at $259,000. And we think we are pricing it at $15 a gigabase. Of course, I want to make sure people understand with higher accuracy, you need less coverage. So $15 a G in terms of price isn't the same with all other customers. And you have to go dive into thinking about the price per answer rather than just how much sequencing you're going to throw at the problem. And we're very excited about this. And I'd also like to announce today that we are officially taking orders for the Onso system now for delivery starting in the second quarter. So now as I just kind of wrap up, we're entering the -- we really are starting to enter the next phase of our journey. And when I put our strategic plan together and the vision for what PacBio could be, we look at it in kind of 3-year increments. And we're coming to the end of the first period of time where we are creating scale to be successful as a company. We're entering the second phase where we're launching groundbreaking new products, building a portfolio of capabilities to serve customers in a number of different markets and starting to drive deep into that clinical journey and then, as we move into the '26, '27 time frame, really creating a company that's poised for durable growth, positive cash flows and really quite a valuable business. So -- but to get specific about 2023, our core priorities are really focused on the rapid adoption of Revio, driving, making sure that launch is quite successful, driving Onso's accuracy into the market and having another successful launch there, continuing to develop the future product pipeline. One of the things our strong balance sheet has allowed us to do is to really start to develop not only the current generation of products but the N+1 generation of products. And these products will leverage some of the innovation that we've announced with Revio, for example, but will go even further, both in higher throughput and in lower throughput, accessing more and more parts of the market and enabling our customers with all kinds of new features. So we'll continue to focus on that in 2023. We're very focused on leveraging our infrastructure now. We have commercial scale. We have the team. We have the operational scale to serve the entire market. And so we're going to be focused on disciplined cost management and creating leverage so that we can push towards profitability; and finally, continuing to expand those partnerships across the ecosystem. This is truly a community that's driving the pace of innovation and insight into biology, and we want to be at the center of that community. So 2023 is really our first step in achieving our pathway to $500 million. As we said at our Investor Day a few weeks ago, we expect we are anticipating 40% to 50% CAGR over this time horizon, starting with the launch of Revio and moving on to Onso and then an entire portfolio of products after that. So we're really quite excited about that. So hopefully, from today, you'll see that we do have the products to accelerate our growth and that Revio and Onso are going to be transformational products for us and for the community. We've developed this ecosystem to be successful, and our balance sheet allows us to continue to grow. And with that, I'd like to thank you for your attention, and maybe we'll go to questions.

Thank you, Christian. That was great. So for the audience, if you have a question, feel free to raise your hand, and we'll get a mic to you. So Christian, maybe we can start. Congratulations on that strong Revio order book. That's certainly well above what I was expecting, and I'm sure it's the same for many people as well. Can you maybe talk to kind of the mix? Obviously, it's a pretty well-balanced mix of different applications and many different customer accounts as well. Maybe speak to which type of customers? Like is it commercial labs? Is it POPSEQ programs? Is it academic medical centers? In which segment are you seeing the greatest kind of price elasticity of demand? And how do you think about kind of that strength of that initial order book in terms of dynamics between year-end budget flush and pent-up demand, how to think about the momentum of that order book going forward?

Yes, sure. I think that when you look at the composition of customers, it really is broad, like I shared on the slide. And we'll see most of the elasticity initial come from -- initially come from the population scale projects, the large academic institutions that have lots of experience with the workflow, lots of experience, lots of samples that are sitting in the freezer. So it will be -- the adoption will be quite rapid, to be honest. But what was surprising is in other parts of the market where maybe they don't need that level of throughput exactly today, but they're envisioning larger projects, more opportunities to explore the biology. And as we all know, it's the ability to drive not only deep into understanding what the coding of the DNA is but doing it over large enough sample set so that you can drive meaningful insight. And I think for the first time, our customer base, and I think the community at large is starting to see, hey, I can operate at a scale that allows me to drive that insight. And so it's really a broad advance across the customer base. With respect to the 76 orders and the way to think about it, there were significant -- from the night we launched it, we had 13 million social media impressions from our launch event and from ASHG over the course of that week. And there was just a lot of positive momentum about -- particularly about whole genome sequencing from telomere-to-telomere. And so we've seen -- we saw a lot of very early orders, especially from the large customers with multiunit orders coming in. But by the time we got into December, we were also seeing the individual customers with 1 or 2 unit orders. And that really was encouraging for me to kind of set the stage for the long-term demand curve that we're going to -- that we expect to see. I would say with respect to -- do you take 76 orders and multiply that by 4 to get the 2023 order number? You probably don't because you see, in any product launch, you see a lot of initial excitement. And then we'll get the product out in the market, and that will drive subsequent demand. And so for us, we do think that this is the kind of product that could create very significant unit opportunity. And of course, the ASP is significantly higher than the Sequel IIe. The combination gives us the ability to grow.

Excellent. So that 30% of the mix in that initial order book to PacBio, how does that compare against your expectations? What was the driver to bring these customers over to the hurdle? And are they kind of conversion from short read to long read? Or were those customers previously using other long-read technologies?

Yes. So Julie, I want to clarify. So the order -- the 76 units that were ordered in the fourth quarter were predominantly from existing customers. It's the future order book that we have, our order funnel that we're working through now to drive the unit placements in Q1 and Q2, et cetera, et cetera. That's where we saw -- where we've seen an immediate uptick of 30% growth. And I think -- for the most part, those new customers are already using short-read technology, and they want to move projects to long-read technology. It doesn't mean they're necessarily going to abandon short-read technology. And I think if you look out at the market over the next 5 years, there will be many different sequencing technologies serving different applications in the market. And so it will become, I believe, more of the norm where there will be multiple instruments in a lab doing different things. And then informatics will be combining insights from all of those different technologies together. But so far, the early customers that we see in the funnel that are going to be new to PacBio are generally already doing some sort of short-read technology, and they want to -- they see the power of HiFi and what it can do.

Great. Questions from the audience? Yes, over there. Let's try to get a mic over to you.

Can you talk about the competitive product offerings? Some of them obviously are new product launches. One of your competitor has both long and short read combined product out and then some international competitors entering the U.S. market. Just if you can maybe lay out what are the features that distinguish you guys and what sort of feature gap. Is it a year, 2 years, 5 years?

Sure. So I think to kind of repeat the question, if you think about where is our competitive positioning and why do we think we can grow and really capture the imagination of these customers, and it's really based on kind of a couple of the fundamental differentiated features. If you take long reads first, long reads do things that short reads can't. They are more complete. You can see more of the genome since it's a single molecule technology. It's enabling so that you can see the epigenetics. You can see structural variation. And you can get the true vision or true view of what is going on with the DNA. That is a significant advantage over short reads because what happens is in order to try to get to some of the same things that you can see with long reads, you have to run multiple assays, which means lots more cost. And so when you look at our single molecule real-time sequencing now with Revio and our price points, we can be absolutely competitive with any short-read sequencing company in the world or technology. And it allows us to, with respect to germline applications, in particular, really be a better technology, a better set of products because you get deeper insights for less money. It's really that simple. On the short read side, we believe that there are some excellent companies out in the market. And in order for us to be successful, we had to develop technology that was highly differentiated and targeted towards specific areas of the market. And that's what Onso really is. The SBB chemistry, as I said before, we believe, is the most accurate sequencing chemistry, quite frankly, to ever exist. And we're seeing this accuracy in our beta customers not just in our own laboratories. That accuracy will allow you to see things that other technologies can't or see things with less sequencing coverage, which means lower cost. And in fact, at ASHG and at AGBT last year, we've demonstrated that, relative to the largest competitor in short-read sequencing, we can sequence, even if they're using UMIs to try to find needles in a haystack, we still can find those needles with fourfold less coverage or more. And what that means is just less cost and more efficient workflow and the ability to get more done for less. That's particularly important in oncology applications, where folks are trying to make -- build a business around that NGS technology. And so we're going to focus on -- so in areas where it's highly differentiated. And we have the luxury of doing that because our long-read sequencing technology is so powerful. And we're the first company that has both native long- and short-read technologies coming to the market that allow you -- that allow us to then position the products in such a way that we can solve the customer's question rather than try to put the -- here's a sequencer we have. Hopefully, you like it and buy it, if that helps a little bit.

So Christian, maybe you can talk about your latest view on the macro. Obviously, we're living in a challenging environment, but your Revio order book suggest that budget may not be an issue for your early adopters. So how are you thinking about the puts and takes there for the 2023 outlook? And then I think in China, we've seen the reopening and the COVID cases [Indiscernible] there. So given your exposure, do you see that as a potential risk factor coming up this year?