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

I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools analyst here at Bank of America, and welcome to our 2023 healthcare conference coming to you live from the Encore Hotel here in fabulous Las Vegas. Our next presentation, our next discussion is with Pacific Biosciences with Christian Henry, Chief Executive Officer. Christian, welcome.

Thank you. Appreciate the opportunity.

You just reported Q1 results last week. Did you want to do some remarks? Or should we just jump right into the Q&A?

Well, I think we can jump right in. We did have a great quarter and Revio, our new flagship sequencer is off to a fantastic start. Probably most exciting is how well it's performing in the field. But yes, we can jump right in.

I want to talk -- I mean, since sequencings very much on the top of everybody's minds these days. I want to talk some big picture questions before we sort of go into the nitty-gritty on your platforms. So look, you've been around this field for a long time. For the first time in many years, customers have a lot of new platform choices, including both on the long and short read side options from PacBio. We've just also seen the price of whole genome sequencing drop from $600 to $200. Historically, when we've seen these price drops and sequencing customers have just run more samples. But the question I'm wondering is like are there -- are we potentially facing a capacity overload? I mean, is there enough samples to sort of fill these machines right now?

Yes. I think if you look out historically, there has always been enough samples to fill the capacity of the sequencers. And I don't think today is any different. If you think about where we actually are in our journey to understand the human genome, let alone the rest of the genomes on the planet, we only 5%, 6% of the genome is medically actionable today. And there's still whole swaths of the genome that we just don't understand. And so there is no shortage of desire, no shortage of funding and you put those together, I do think that although you may see in any particular 12-week period or 13-week period in a quarter, maybe there's machinations. But on balance, there's no question that we're moving to continued more sequencing and there's really no end in sight.

Got it. So I think historically when we've seen price drops, people just run more samples. But I guess when you're talking to labs right now and the sort of segues into talking about your products, is -- are people just going to run more of the same old samples? Or are they going to start looking at newer technologies like PacBio to basically spend -- maybe get to more incremental information as opposed to just writing the same mode experiment again. Yes, how do they spend that savings?

So I do think it's very clear, particularly with the launch of Revio that there's a huge hunger in the market to understand and get a more comprehensive view of the genome. And that's what long-read sequencing technologies do over the historical incumbent technologies is that they give you with single molecule resolution, they give you much more of the picture. They allow you to look at the dark regions of the genome that are unreachable by short-read technologies. They allow you to look at methylation status and epigenetic markers, which are being found to be much more important than we ever knew in regulating genes, turning them off and on. They look at structural variations. So having a more comprehensive view of the genome gives researchers hope that they can uncover more of the mystery of the genome. And so what you're seeing is that you're seeing projects now start to move portions of their samples over to long-read sequencing. And over time, perhaps in certain areas, the whole project gets done with long-read sequencing and hopefully on PacBio instruments. But that's the paradigm that's happening right now in the market. A better visibility and good economics is enabling a whole new wave of science that we're going to see over the next several years.

So -- and you do think that that's ultimately just a cost question versus a...

Well, I think it's...

Science question?

Actually more a -- it's a cost question. The science, it's pretty much undisputed that people want to see more of the genome. That's undisputed, I believe. It's really do you have enough throughput and do you have the right economics. So it's both cost and throughput to be able to do the scale of experiment required to develop that insight. And that's one of the reasons why we developed the Revio system, which is our new flagship sequencer that gives you scale that's unprecedented. It's 15x more capable than anything that we've ever had before. It's at economics. In fact, I saw just a preprint that was just out earlier this week, where they show at 12x coverage using PacBio long reads, you get variant performance consistent with 30x short-read technology. So what does that mean? At list price, genomes today that you can buy today using our technology under $400 a genome. And so there's all this talk about the $200 genome. The reality is that the $200 genome is not here yet, right? It's purported and it will come. But the actual in the field, it's not there yet. And on top of that, the only way you get to $200 is if you're a very high throughput lab and you have the batching, not that I'm doing competitive comparisons right now, but it's all part of it.

So -- but I mean, basically, there was some arbitrary designation that 30x was the right definition, it's like is that moving away right now is the -- because I mean, look, there's always a question of accuracy and all the blah, blah, blah, this type of stuff. And that means there's a reason why 30x was sort of done. Is that antiquated?

I do think that that's becoming more antiquated. I was actually in the room when we decided 30x was the right coverage and in collaboration with lots of different people. And back in the day, David Bentley was one of the leaders of that at the time. And it was -- that was a happy medium. The reality of biology is that it's complex. In some areas, you want to do 100x or 60x. In other areas you want to do 2x or 0.5x and it really becomes the experimental design. And so I do think the community understands that 30x was -- has been kind of just this arbitrary benchmark that we try to match coverage, which equates to economics to a certain level of performance. Now that long-read technologies are really becoming much more mainstream and much more capable, that paradigm is changing.

So then let's segue and talk about Revio. Can you talk about the initial demand you saw for it? I think you've reached -- I think you had 6 orders in Q4, I think you shipped 32 in Q1. What's your backlog? How should we sort of think about as demand greater than expected, just sort of your initial thoughts on the launch?

Yes. I think that I mean, it was quite remarkable for us to start the launch with 76 orders in the fourth quarter. And that gave us a huge jump start on when we knew we were going to start shipping in March and gave us a very strong confidence that we -- first of all, we had the right product and then it was just could we execute. In Q1, we executed and we delivered more than I expected us to deliver and the field performance of the machines has been really quite strong. Every new instrument launch has its nuances and challenges, but we really have seen that on balance, the heart failure rates, the data that people are getting is all above our -- generally above our specification and working quite well. So all of that's gone well, which has driven us to have strong order book and a strong forecast going into the rest of the year. We've decided not to give quarter-to-quarter orders. And so I'm not going to give any new information today on that. But what I can say is that our orders in Q1 were more than we shipped in Q1. So we built net backlog during the quarter, which sets us up really well for Q2. In Q2, we will scale our manufacturing to its steady state. And matter of fact, we're pretty much almost there now. Over the course of the quarter, we're scaling up. And what we will do is -- so as a result, we expect to ship more systems in Q2 than in Q1 as everyone would expect. And then we will evaluate whether or not we need to scale manufacturing even further down the road. The good news is that we have a combination of contract manufacturing and manufacturing floor. And so we're able to scale with reasonable time horizon. So it's not going to take us that long. So hopefully, that helps.

Yes. So in terms of the orders, how many of these are people that have already had some sort of experience with PacBio, they either had a Sequel or a RS or how many of these are like new to PacBio customers?

Well, if you look at Q1, 2/3 of the orders were from people with experience and about 1/3 was new to PacBio. In fact, our largest order in Q2 was a brand new customer. They bought multiple Revio systems. And what they're going to do is they're actually going to replace their whole exome sequencing with whole genome sequencing using Revio. And this is in a clinical setting, a clinical research setting. That's actually quite remarkable because it shows you where we're going.

Yes. Well, it's funny because I further down my question list is like what needs to happen for long-read, holding in sequencing to make a significant adoption of the clinic. So that was sort of like one of it. So clearly, that is -- what's unique about this customer?

Well, this customer is a very large clinical diagnostics customer. And this particular order came out of Europe. So that's actually a little bit remarkable. You would think normally that would start in the United States and then feather its way out through the globe. But this is actually some folks that are in Europe. I'm not going to give -- for competitive reasons, we're not going to actually give the customer name today, but it's actually quite exciting. And it actually hits the fundamental belief. So if you remember back in 2021, we did a project with methylation Invitae that didn't bear as much fruit for different reasons. But that was the vision. The vision was how do you convert the human exome market in a clinical setting to genomes. And as you do that, you get so much more value out of the genome that everyone does well. Patients do better. The clinical diagnostic labs do better. And obviously, we're the engine that provides all of the technology for that. And that's really super -- it's congruent with our mission, right? We're trying to leverage the power, the promise of genomics to better human health.

So then how do you think about the potential for the installed base, right? I mean are you expecting your legacy platforms, those by customers all upgrade change?

Yes.

I mean -- and then what do you think is sort of like the new incremental -- basically, it's like how do we sort of think about the potential for the TAM on the boxes?

Yes. Well, I think the -- if you go back and start with the history, basically, PacBio has been able to double their installed base with every generation of technology. And so if you just use that as a starting point framework, we have a little bit more than 500 in Sequel 2s in the field, 2 and 2s in the field. So that would give you math of 1,000 instruments if we follow that paradigm. That's certainly not out of the realm of possibility. We see where the customers are and we see the scale of the other sequencing platforms. One of the good things about being a fast follower or maybe slow follower, but a follower, there is that we see who in the world is doing sequencing and there's a lot of sequencing to be done. So I do think 1,000-plus instruments is not an unreasonable thing to be thinking of time -- we can debate about the time horizon, but that's what I think could happen.

And so what do we think about the potential for consumable pull-through? I mean that's -- everyone's always your box cost X and it can pull through Y on this and it's like how do we think about the consumable stream? And obviously, you're launching a bunch of new machines right now, so people are not going to be fully up to speed...

Right.

Right. So there's going to be some bleed down in terms of the consumables, just the way the math works on people ramping up.

That's right. Well, we've been -- on our earnings call, we got that question about 18 different ways. And what we've said very clearly is that we don't know the answer yet. But the capability of Revio is such that at its maximum and you think list price and maximum throughput, it's roughly 1,300 genomes a year or $1.3 million genome, give or take -- or $1.3 million a system per year. Typically, based on my experience, instruments run between, say, 30% and 35% utilization over the course when you look at the whole installed base. The early installed base is likely to be use their instruments more than the late installed base because you're going to the end customer. And so what actually happens is you end up with a distribution -- a bimodal distribution effectively of customers that use it maybe at 60%, 70%, 80% and customers that use it at 10%, 15%. And you'll see that. I don't expect this to be any different. But what that means for us is that on balance, you probably are in the 30% to 35%, 40% range. If you can -- for us, that's massive because it has so much more capability. It changes the dynamic of our entire P&L, right? Because consumables are generally higher margin than the instruments. And therefore, we get -- as that product mix shifts, we get a lot more gross margin, which is a good thing.

And what's the list price of the Revio?

The Revio is $719.