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

Thanks for joining us this morning. My name is Matt Sykes. I'm the life science tools and diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming CEO of PacBio, Christian Henry, here to our conference this morning. Christian, thanks for coming.

Yes. Thank you. My commute was short today.

Yes. We try to make it easy for you.

Thank you.

Maybe I think it would be helpful for you to maybe set the stage for us, just talk about sort of the key accomplishments over the past year, most recent results and kind of what you're looking forward to in the second half of this year.

Yes, sure. So this has been a transformational time for PacBio. We set out with a bold set of objectives and strategy to develop to really leverage the power of HiFi and develop a new portfolio of long-read sequencing products. And we were -- we announced the Revio system in last October. And by December, we had 76 orders on the books. By March, we shipped over 30 instruments of those 76 to a very diverse array of customers across the states. And I think that's actually one thing that's been surprising is how broad and how swift the adoption of Revio has been. And really, Revio is the first long-read sequencing system that has the level of industrialization and the throughput and the cost profile that really enable large-scale genomics and I think that's one reason why our customers are so excited. And so we've got Revio off to a great start. We continue to see strong demand for the product and I do think it will be the workhorse product for the company for the foreseeable future. So that's great. In 2021, we acquired a short-read sequencing company and some people thought we were crazy to do that because we have this great long-read sequencing technology but the reality is that there is a large part of the market that long-read sequencing doesn't cover as well. And we wanted to be the first company with both best-in-class long and short-read technologies. And we announced that product, Onso, the first short-read sequencer in October as well and we're going to start shipping that product over the next few months here. And so we're right at the end of the development program in the validation. Our objective is to get to the end of June and start shipping it. We're going to be -- we're probably going to be a few weeks behind that, but not significantly behind that. What's interesting is that the combination of launching 2 major platforms in the same year for a company like ours gives us an incredible launching pad for growth and that's exactly what we're seeing. We've seen several orders for Onso already come through the beta. The beta customers have done amazing work and they continue to do that. And at this point, it looks as though all the beta customers are buying the system as well, which is a vote of confidence. And so when you think about where -- what -- where we've come from, we've come from this place of 1 product, serial product development, and now we're in a world where we have multiple products that are best-in-class. We have a robust product pipeline. So we've actually accomplished quite a lot in the last 12 to 18 months.

Got it. You just gave a great overview of the products. Maybe a little bit deeper dive, just kind of talk about Onso and Revio instruments and how sort of your offerings are differentiated in the growing sequencing market? And how can you win in each of that long-read and short read?

Yes. Well, if we start with -- first of all, if we start to think about how the sequencing market in my view is going to evolve over time, it's -- the -- it will no longer be a monolithic-technology market where either one company or one short-read technology controls all the market. What I think will happen over the next several years is that the best sequencing technology for the application will emerge for that particular application. And so when we talk about sequencing a few years from now, I think we'll be talking much more about application rather than long or short reads, because from an economics perspective, the long-read sequencing on revenue -- on Revio is absolutely competitive now with short-read approaches. And so as a scientist, what we're doing is -- as a scientist, now you have a choice. And what we have done with Revio specifically is that it's 15x more powerful than the Sequel IIe platform, our prior generation, that runs 24 hours. You can -- we actually sequence 100 million single molecules simultaneously. And by sequencing at the single molecule level, we're able to preserve all of the information about that molecule. So the methylation and epigenetic status that we're able to see -- because we have long reads, we're able to see large translocations are -- because we have HiFi, it's actually the most accurate sequencing technology commercially out there today, only perhaps surpassed by actually Onso. And so now we have this highly accurate long-read sequencing platform that's gaining incredible traction, particularly in whole genome focused applications. Because in reality, if you're taking the time to prepare the sample -- acquire the sample, prepare the samples, you want to get -- extract as much information out of that sample assuming the economics are reasonable. And what's happening in the market is that no longer is the sequencing itself the most expensive part of the experiment. It's all of the things around the sequencer. So when you get to sequencing, you certainly want to extract as much information out of that sample as possible. And that's giving us an incredible opportunity to gain ground in germline-based whole genome applications. And so that's why we see Revio as such a powerful product and we're off to a great start with that. On the Onso side, it's the accuracy and it's the -- it's really accuracy that no one's ever seen before. Our beta customers routinely talk about Q50, which is a measure of the sequencing quality, higher is better. Q50 results and even higher across the entire read length from the first read to the -- in single -- in single ended reads to the 200 read or 200 space or impaired and 150s, the entire sequencing run. What does that really mean? No one's ever actually explored that level of accuracy before. And what we're finding is that in head-to-head comparisons against other short-read technologies, you can actually see things that the other technologies can't see because of that accuracy and what that means is that in major applications like residual disease testing in oncology, perhaps you can see the variants sooner. And by seeing those variants sooner, you can perhaps help the patient faster. And we know in oncology, it's a race against time. And so that's actually really exciting to introduce that into the world and see how the world is going to take that up. So the advantages of Onso are the accuracy. It's a mid-throughput system with very competitive economics in the mid-throughput segment of the market. With Revio, it's a revolutionary new product that's basically changing the germline paradigm. So I like where we sit.

Good. I want to explore a little bit. You talked about sort of the cost of long read versus short lead and sort of where we are today. Sort of we see the economic differential between long read and short read, kind of getting to the point where the information content of long read becomes a more significant decision point for customers over time. Now that the costs have actually come down and are closer to parity, how do you see the longer-term shift from short read to long read? And how are you positioned? I mean maybe it is this application focus you talked about, you can address it that way, but I'm just kind of curious, as you sort of see that long read versus short read. And maybe it's not the 2 together, maybe it's actually on an application-by-application basis where the relevance actually exists.

Well, I do think that -- my belief that the market is going to segment itself based on application and technology, it's pretty fundamental to our thesis as a company of how we're going to grow. And what I see specifically is in germline-driven applications, long-read technology generally is likely to be a better solution because of the comprehensiveness of the answers that you can obtain. And in areas where you're trying to count lots of molecules or you're trying to look -- or the DNA itself is fragmented and small, that's where the short-read technologies are going to continue to thrive and be probably the driving technologies. What I -- another thing that's perhaps maybe different in the paradigm that's emerging, is different than the past is where we see -- I see labs that are going to be mixed labs, and they're going to have different sequencing technologies depending on what they're doing because very few labs actually do only one thing. There are some, but there's not that many. Historically, over the last 15 to 20 years, there really hasn't been many different technology choices. And so a lot of times, the customer will fit a round peg into a square hole or vice versa. And that paradigm is changing now that you have choice. And when you think about the economics, today -- recently, there has been some papers that have come out that shown that -- have shown that PacBio sequencing at 12x coverage, which is the amount of coverage to make sure you get a highly accurate sequence, is equivalent to SBS chemistry at 30x coverage. And we -- to put that in economic terms, we priced our whole genome based on 30x pricing because we didn't want to confuse the market, quite frankly. We believe that our technology would actually require less coverage to get to the same accuracy, but I didn't want to cut any corners. And so we priced our technology at $995 a genome. But if you use 12x, which is equivalent to what's out in the market today, the actual price for genome is about $397. And you compare that to claims that the $200 genome this year, the competitive -- the economics are completely competitive now given the quality of the information and the comprehensiveness that you get. I think that's turning heads, quite frankly.

Do you think some of the early Revio customers are doing more 12x relative to 30x? And so that lower price point is actually the more market relevant costs we should be thinking about versus $995?

Certainly, in population scale type programs like the All of Us program that's going on in the United States, they're seeing 12x as a perfectly reasonable spot to be in to get all of the varying information you want plus structural information plus epigenetics. And by the way, those things come for free with every run relative to the SBS technology. So -- the one other thing I'd want to say about coverage because I do think investors and other stakeholders sometimes get a little bit confused. Every experiment is designed based on its own coverage model based on the statistics of what the experiment wants to achieve. And therefore, in a clinical setting, actually, many customers are at 30x or 40x and maybe at 60x or 90x or even higher with short-read sequencing technologies. And so people should think 30x is really just a benchmark against the different technologies and not necessarily the driving scientific paradigm these days. Does that make sense?

Yes. Maybe talk a little bit about the rare disease market. Being sort of an early adopter of long-read human genomics, how do you size the rare disease sequencing opportunity and sort of the growth rate you're assuming for this market?

Yes. So the rare disease market, rare disease is a misnomer. It's a compendium of thousands of different diseases of each one onto its own a small number of patients but in totality, it's a massive potentially multibillion-dollar market for the company over time. The key dynamics of that market are really how do you -- right now, that market is really a translational market where each patient is an N-of-1, so to speak, and that's why long-read sequencing technology is so powerful is that it just improves the ability to try to understand what's going on, whether it's in a research context or a clinical context. And although oftentimes, once you figure out what's going on, there is no necessarily -- known treatment necessarily. Sometimes there is, but oftentimes there isn't. The peace of mind that the family gets, the ability to try to manage and at least understand what's going on in the patient really drives that market opportunity. So it's a combination of increasing the "solve rates" as well as where it's actionable, taking action and where it isn't, developing that understanding. And so those are driving the growth. I think it's in an acceleration phase right now. Certainly with Revio, we've seen some of our largest rare disease customers adopt Revio very quickly and are fully up to speed. And in fact, one of the largest -- the largest deal we actually did in the first quarter was a deal with a diagnostic company that bought several Revios to change their paradigm on how they look at rare disease from an exome-based paradigm using short reads to hold genomes using Revio and using HiFi and long reads. And the reason why they're doing that is they think they can, one, increase the solve rates; and two, they can use the long-read information to -- in lieu of other diagnostic tests as well. So they can actually make an economically favorable decision by using Revio. And I think that paradigm will continue to emerge and expand quite frankly over the next couple of years.

Got it. I know Revio just hit the market, but I'm already going to ask you what's next for the development road map for Revio? High throughput, benchtop products. Could you talk about sort of what you envision the time line to be in the development? And then what portion of the market do you think that opens up? And what are you not tapping now without those products?

So I think having -- when I first joined as CEO in 2020 and early 2021, one of the core strategies I talked about was the notion of having a multiproduct portfolio in the long-read sequencing space. And the reason for that is that you can reach customers in different parts of the market and you can also protect your pricing [indiscernible]. You don't end up selling the products at the lowest common denominator, so to speak. And so when I joined the company, I set out on a multiproduct development program and Revio is really the first product there. But at our Analyst Day back in November, we talked about developing benchtop sequencer and also an ultra-high throughput sequencer, which would mean Revio would sit in the middle of the product portfolio, and that's how you should be thinking about it. The benchtop sequencer is really, it's essential to our success and the reason for that is we need to create more ubiquity of long-read sequence in the world and the benchtop system would be a lower capital cost, more expensive consumable cost instrument or platform. And it would be targeted towards basic research, agricultural applications, lower throughput clinical applications and it would really be the feeder to feed into Revio so you could create a captive customer base to upsell into the next level. That product is well under development and although I'm not ready today to talk about specific time lines, you can imagine that it leverages a lot of the advancements of Revio and will make it to market much faster than, say, a traditional product. On the ultra-high throughput side, that product really is -- when we think about ultra-high throughput, we think about perhaps another order of magnitude or in that sort of range above where Revio is in terms of throughput, most importantly. Because at higher levels of throughput, it enables you to really take on the 100,000, 200,000, 300,000-sample programs with reasonable labs, reasonable instrumentation. And the gating factors to that are chip development so that you have more advanced chips. For those of you that don't know, our smart cells are actually start as a semiconductor and then we put -- and then we add layers and the ability to do biology on top of a semiconductor onto the chip. And currently, we have in the Revio 25 million ZMWs, which allows us to look at 25 million molecules simultaneously. And in Revio, the way we apply it is we take 4 of those and do that as a sequencing run. When we get to ultra-high throughput, the strategy is to have even higher, more capable chips and those chips will have -- they'll be -- the spacing will be closer together. Therefore, you get -- it will basically be the same form factor, yet deliver a significant amount more capability. And that will continue to lower cost and increase throughput. And then we will be -- then the next step here is optimizing the compute envelope so that you can figure out how many of those very high-powered chips you can sequence simultaneously. The beauty of having multiple chips in your platform is that you don't run into the batching issues as much as, say, other high-throughput short-read sequencing companies. Because when you think about it, there really aren't that many customers in the world that can, say, spend $50,000 or $60,000 a run and deliver -- and need 100-plus samples per run to generate those economics. And so by having it somewhat segmented by different chips and being able to run independently, it allows you to run the system with fewer samples required at a time, which in fast turnaround applications will actually be really, really essential. So stay tuned on that. But when you think about over the next several years here, we've invested to build a very strong, very competitive multiproduct portfolio on the long-read side. And on the short-read side, we're just getting Onso to market now, but you can imagine that we do think that there are opportunities to have even higher throughput Onso to build out a portfolio there as well. So if you look out, say, over the next 4 or 5 years, you're going to see a very broad portfolio of a multi-omics company.

Got it. Maybe just staying on Revio for a few more minutes. Obviously, the shipment numbers have exceeded expectations. Could you talk a little bit about the mix of new versus existing customers? And then just talk about the ASP dynamics. There was obviously some discounting where people have recently bought Sequel IIe. So maybe talk about sort of how that ASP ramp looks like? And then lastly, what should we expect -- it's obviously too early today. What should we expect from a pull-through perspective from Revio? Just sort of the overall economics and customer mix for Revio?

Well, I think -- so first of all, the customer mix has been probably better than what we would have expected. Last quarter, we had about 1/3 of our customers were brand-new to PacBio customers. That's awesome when you're trying to build out a market and build out a capability. It kind of -- it signals to us that, yes, there is demand for long-read sequencing. And we just hadn't hit the throughput of price points. We had -- now we think we've got the product right. And so our funnels continue to have roughly about a 30% to 35% new customers. It's a global marketplace for us. I think one of our competitive advantages certainly over the emerging companies is that our commercial infrastructure and our ability to execute is significantly more advanced than them, and that gives us the ability to sell globally faster. When I think about ASPs of the Revio system, specifically, one of the things based on our many years of experience at launching new products is really essential is that as you're building out a customer base, you can't alienate that customer base. And so one of the most important things that we did at the very beginning of the launch was create a customer loyalty program so that at launch, the customers that had just bought a sequencer maybe a few weeks before aren't so -- yes, they're disappointed they didn't know about Revio, but economically, we effectively kind of made them whole enough and by giving them a significant discount off of the Revio system. Now of course, when we were planning the pricing for Revio from the very beginning, we were contemplating that we would do that. So it was all part of the plan on how we priced Revio to begin with and then how we gave -- for customers that bought a sequencer in 2022, they got a certain discount. For customers that bought one in 2021, they got a little bit lesser discount to account for the fact that they've been using their Sequel IIe system. And so that had a detrimental impact on ASPs, particularly in the first -- we'll bleed through most of this year as we work down that -- the backlog that we started with, but what you should see is that ASPs are increasing basically every quarter a little bit and then we get to steady-state ASPs probably in Q1 roughly of next year, give or take. And that's totally by design. It means that ASP is actually going up, which doesn't happen very often when you launch a new product. The last part of your question with respect to pull-through, I've been pretty consistent in saying, look, we don't know. We don't know what the pull-through is going to be yet. It is a -- one of the biggest areas of variability in our financial guidance that we've given. We gave a pretty wide range of guidance on our last call and the reason for that is that there could be lots of different outcomes as customers transition from the Sequel IIe consumables to Revio consumables. Revio has 15x more throughput and therefore, we have to fill the -- we have to make sure those samples get filled. The good news is that we're off to actually a pretty strong start. And so we'll see how the quarter ends and I'll be happy to update everyone on our call, but for those of you that are trying to model this out, I probably wouldn't -- I would look at these numbers and just kind of their data points. But realistically, I probably wouldn't say we're going to achieve a steady state until sometime next year as the transition of Sequel IIe kind of finishes up and Revio gets fully ramped and projects get put on to the Revio. So that's how I would think about it.

Got it. And then just turning to Onso, you did actually kind of answered this question earlier about sort of early feedback from the beta customers. It sounds like a number of them are going to be purchasing, but also in terms of the time line for launch, maybe a few weeks later. Maybe give us a little more details on that. And then how are you thinking about longer term placing Onsos and then the ability to maybe cross-sell into long-read capabilities for the labs where that's a relevant purchase point?

So with Onso, as I said earlier, we're right at the goal line here. We're in our verification and validation phase. We're probably a little bit behind where I really wanted us to be, but it's a matter of weeks, it's not quarters. We're -- so whether we get a few instruments out this -- at the end of the year -- or at the end of this quarter or early part of next quarter, on balance, it doesn't impact our financial results really or our guidance at this point in time. But it impacts how the market perceives how we're doing, and I think what we're seeing, which is extremely encouraging, is these beta customers and the early excitement about the platform. In fact, we were at ESHG this past weekend, I wasn't but the team was, in Glasgow. And Onso was -- a lot of conversation about Onso because the accuracy is exciting, the economics are compelling. It's a perfect mid-throughput box, for example, in the European market. So there was a lot of good discussion there. When you think about cross-selling, it's actually kind of foundational to our strategy because now as a company, we can go to any customer doing sequencing anywhere in the world and have a different kind of conversation. We can have a conversation not so much about technology, but about solution selling. What are the challenges Mr. Customer or Mrs. Customer that you have? What experiments do you want to do? Let's help you figure out what the right technology solution is for the applications and I think that's just a different way of interacting with your customers that's not necessarily typical in life sciences. And I actually think it's a differentiator for us. The other thing I would say is we already have POs in-house where people are bundled -- we're doing -- we have a bundled program. And so we are seeing the benefit of buying Revio and Onso, not only does the customer get a great economic opportunity, but we increase our footprint inside that customer with every "socket" that we plug into and I think that's super compelling for us down the road.

Got it. I'm going to ask you to play Susan for a little bit and have some financial actions. But last quarter we saw, as we expected it, instrument heavy mix versus consumables, and you've talked a little bit about that. Obviously, instruments having a lower margin profile versus consumables, but what are some of the potential sources for margin expansion given this mix in a short term? You set out some longer-term gross margin targets in 2026. Maybe kind of help us bridge how you're getting there. A lot of this is just mix shift? Or are there other aspects you can do in the business to help that margin expansion?

Well, I think there's probably 2 or 3 fundamental drivers of the margin over the next few years. As we've said, 2023 is this transitional margin year, so gross margins will be a bit all over the map. But fundamentally, as Revio consumables increase, the mix of high revenue -- high gross margin revenue versus lower gross margin revenue will shift into our favor. And the reason why that's happening isn't because of some magical thing we're doing. It's because Revio is so much higher throughput that the pull-through is going to be higher than any product we've ever had before and it will be more like the other life science sequencing companies. And so that will help -- that will really be a major driver of gross margin expansion. The second driver is scale. As we grow and scale our revenue and scale our installed base, we have incredible opportunities with respect to driving overhead down on consumable manufacturing, for example, using larger batch sizes. And by using larger batch sizes, the actual overhead for those of you cost accounting geeks out there, the overhead goes down tremendously and drive -- that's why those products have gross margins in the -- anywhere from the high 70s to the high 90s because it's really the scaling and you have the same amount of man power doing bigger batches. So you're going to see that from us. You're also going to see that as we increase the volume of instrumentation, pushing more -- starting to run things like multiple ships through our manufacturing facility, improving the overhead there dramatically, our supply chain, the benefits we get from scale and supply chain. The reality is that the company has never really had the opportunity to scale like it does today and those scale benefits will be felt across the entire portfolio. Whether it's the margin on the consumables themselves gets better or the instrument margin gets better or the consistent -- or the ability to manage our inventory in a more of a just-in-time sort of way such that -- because we have so much more consistent demand such that our inventory carrying costs. I'm an old CFO, so cash flow and thinking through the operations process is -- it's very important to me because it is the foundation of a great business.

Got it. Maybe just talk a little bit about China. There's obviously been a lot of -- it's been a focus of conversations so far at the conference. If I remember correctly, I think you grew 40% in the quarter in China. How do you sustain that growth in the region? And what are you seeing from sort of the customer base there in terms of domestic versus multinational competition? Are we seeing any changes there as to what your customers are doing and saying and having to do?

Well, I think first of all, addressing competition in China, on the long-read side, there really is no competition. There are no long-read sequencing companies that we're aware of that are Chinese based that are competing domestically there with us. So that's not really an issue. We have a very concentrated customer base today. And if you think about how we operate, we operate principally through a very concentrated group of service providers, which then serve the entire Chinese market. And so we're a little bit removed and that's why oftentimes you see us when other competitors talk about massive exposures in China, we tend to not have that. One, because our customers are concentrated; and two, because those customers actually are Chinese customers serving the market and therefore, in some respects, "kind of domestic" kind of -- I mean that's -- I don't want to stretch it too far. But when we think about looking out into the future in China, we think we have an incredible opportunity to expand our footprint and really start to drive beyond those service providers directly into the market with a much bigger and more robust kind of commercial organization and so. Now we have a China -- we have a China country manager, which we didn't have a few years ago. And so we've been increasing our direct kind of sales force. We still use distributors, of course, but that helps us get deeper into the market. So when we look at our opportunity over the next few years, it is dramatic just because we haven't been there, quite frankly, in an expansive way. And yet on the flip side, we've been kind of insulated from any risks because our -- at least so far, our customer base is concentrated. So I'd say we're really at the beginning of our China journey as opposed to kind of fully developed.

Got it. And then maybe as we close here, talk a little bit about capital deployment. A lot of the focus has been organic, just given the product development that you're working on, but you raised capital earlier this year, so the balance sheet's in good shape. Could you just talk about sort of how you're thinking about capital deployment?

Yes. So -- well, first of all, we expect to achieve the Omniome milestone here in weeks, give or take. And so that we have a milestone that will be due in stock and in cash. That will be $100 million of cash. So that was one of the drivers for doing the raise earlier this year. And then when you think about kind of our opportunity set, we have a big vision of who we want to be. We think we can be a multiproduct, multi-omic company but right now, we have to really focus on solidifying our position in the sequencing market, having incredible launch of Onso, we've already had a fantastic start to Revio and building that foundation because that really sets the stage for us to do other kinds of M&A. But also what we've said very publicly and we continue to standby is, we expect to get to cash flow positive in 2026. That is a front center goal that pretty much every single staff meeting we talk about. And that's -- so when we think about capital, it's doing smart M&A that helps build our portfolio and drive revenue opportunities, but also it's prudent expense management and gross margin expansion so we get to that cash flow -- get those cash flow positive figures. We do continue to believe that we have enough cash on the balance sheet today to get to -- to achieve that milestone of being cash flow positive in '26. It doesn't necessarily mean we won't raise money again. That -- those are maybe slightly different things, but we're in a very strong financial position right now and the business continues to improve. It's just a really exciting time to be part of the PacBio story.

Great. Christian, thank you very much.

Thank you. Good to see you.