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

Perfect. Good afternoon, everyone. This is Rachel Vatnsdal Olson from the Life Science Tools and Diagnostics team here at JPMorgan. I'm joined by Christian Henry on stage, CEO of PacBio. And so, as you've typically seen with most of these sessions, it will be 40 minutes, roughly 20 minutes of a presentation followed by 20 minutes of Q&A. If any of you in the room do have questions, feel free to either submit them via the portal or you can ping them to me directly. And with that, I will pass it off to Christian.

All right. Thank you, Rachel, and thank you, JPM, for the opportunity to present in front of all of you today. Also, thank you to all of you for your attention and your interest in PacBio. Before we get started, I want to remind folks that we do have -- we might be making some forward-looking statements. So please refer to our SEC filings as well as our website to learn more about the risks and uncertainties associated with PacBio and our business. With that said, let's get started. Our mission at PacBio is to enable the promise of genomics to better human health. We do this by developing cutting-edge technologies that enable researchers and clinicians to do things and see parts of the genome that they could never see before. To give you some perspective, for those of you that don't know much about PacBio, we've had products in the market for over a decade at this point. We've shipped over 1,200 sequencers globally, and we have thousands upon thousands of peer-reviewed publications. Our business model is a [ razor blade ] business, where we sell instrumentation to customers, and those customers use our proprietary consumables on those systems. We also sell the entirety of the workflow from sample preparation kits through analytical tools. And that -- what's really important in a hallmark of the company is that our technologies are highly differentiated from others to give our customers a better view into the biology. Today, I want to leave you with 5 key takeaways. First of all, 2023 absolutely exceeded our expectations. Revio, the system that we launched, our new flagship long-read sequencer that we started shipping in March, exceeded all expectations and has really given the customers a new level of capability to break the $1,000 genome barrier and scale their science. Onso, our short-read sequencer, we started shipping in August. And so, we launched 2 major platforms this year. The hallmark of Onso is unprecedented accuracy, and we're in the process of scaling that product up. The 2 of the platforms as well as our pipeline have increased the interest in PacBio and the interest of the company is higher than it's ever been in our history. And the good news is that we are financially very well positioned for the future. We ended the year with over $630 million in cash. So plenty of capital to fund our growth initiatives as we move towards being a cash flow positive entity. The markets that PacBio serve are large and they're growing. Today, we estimate the market to be greater than $7 billion a year and growing at roughly 10% to 15% per year. And if you look at the panel on the right, you can see the composition of the market based on the different types of technology, whether that's high throughput short-read sequencing, mid and low throughput short-read sequencing or long-read sequencing, which is where is -- PacBio has historically played a very significant role. But with the acquisition of Omniome and the subsequent development of the Onso product, we now have the opportunity to participate in the entirety of the market. So not only are we growing the long-read portion of the market, we can now participate in the entirety of the market, which gives us access to that entire $7 billion market. The reason why this is so important is we can enable the breadth of the -- entire breadth of all of the applications in the sequencing market. On the long-read side, we use -- our technology is called HiFi and HiFi sequencing is really best suited for germline driven genomics, things like complex disease research, clinical whole genomes, plant and animal biology, where the genomes are actually quite complicated, immunology, et cetera. But we span the spectrum and our SBB technology, which is -- stands for sequencing by binding technology, allows us to drive into therapy selection and really those oncology applications where you're looking for a needle in a haystack. So our strategy is to span the entire market with best-of-breed technologies that serve our customers. I want to spend just a second talking about our 2 flagship products, Revio and Onso. So Revio, as I said, started shipping in March of this past year. And the hallmark of Revio is it's unprecedented scale. It's 15 times more powerful than any sequencer that PacBio had launched in its history. This gives us the ability to sequence over 1,000 human genomes per year on the system at a price of under $1,000 a genome. So, we're finally unlocking the scalability and affordability required to do population scale research from telomere-to-telomere. The system is highly accurate, which is very important when you start to think about the level of accuracy required to understand the complexity of the entire genome. We started shipping this, as I said in March, and we shipped 173 systems in 2023. Onso is our midrange short-read sequencer and our first foray into the short-read sequencing market. What makes Onso so unique is the unprecedented accuracy and it's quite extraordinary. Over 90% of the bases are Q40 or better. And in fact, when you look at a particular read, you can see the accuracy from the first base being nearly as high, or the accuracy of the last base being nearly as high as the first base. No other sequencer in the market has been able to show that. In fact, we're so excited about this SBS -- SBB technology that we are developing a high throughput system based on an acquisition of a company called Apton that we developed, or that we acquired in August of this past year. And this will allow us future high throughput applications and capabilities with short-read sequencing. Want to dive into HiFi a little bit more, because I want to help everyone understand why long-reads are so important and why HiFi in particular is creating an incredible transition in the market. In 2023, long-read sequencing was the method of the year, so to speak, and this is on the back of completing the first telomere-to-telomere genome. So really truly the first fully sequenced genomes. And what we're seeing is based on all of that discovery, that now our customers and researchers around the world are really focusing on how do we build long-read pangenomes across all of the different sample types of human diversity. And this will give our researchers a much deeper insight into the fundamental biology of all of us. But also HiFi sequencing enables, for the first time, really full isoform and full transcriptome research, so taking RNA analysis to the next level where you can really understand each splice variant and its impact on a particular sample. And finally, with every single Revio run, you get the methyl-C [ calls ] or the epigenome, and it's becoming more and more apparent that epigenetics is absolutely fundamental to our understanding of how DNA is actually regulated. When you think about our short-read sequencer Onso, accuracy is really what matters. And there's really -- the reason why it matters so much is it gives our customers choice. Either they can sequence less at lower cost, or they can sequence more to see a resolution that is really unprecedented, looking for variants, those needles in a haystack from 0.1% to 1% where most technologies are kind of looking in the 1% to 5%. It allows our customers to characterize highly complex regions of the genome and also have the confidence that when they get an answer, it is the right answer. And I think that's really what's interesting about this technology. Onso has started shipping and our customers are getting fantastic results. Here's just a couple of customers that we recently shipped to. Queens University in Belfast is using the technology for a broad range of applications, everything from looking at cell-free DNA to environmental applications. A major hospital in Ecuador is using the system to look at liquid biopsy, focus on those oncology applications. And this is really indicative of our core strategy with the short-read portfolio. We're not trying to build a sequencer to do every single application. What we want to do is focus on that extraordinary [ accuracy ] to drive into those liquid biopsy and oncology applications where looking for that needle in the haystack can make a fundamental difference in a particular patient. The Onso platform itself is over 800 million paired-end reads with Q40 plus accuracy, up to 150 gigabases per run. And that means it puts it on par with the other mid throughput kind of sequencers in the market. So now, I want to just recap 2023 quickly as we get -- and then get into 2024. We really had 5 key objectives: driving adoption of Revio; demonstrating the extraordinary accuracy of Onso; driving innovation so that we continue to develop new platforms into the future and create a scaled organization; expanding our partnerships, particularly in rare and undiagnosed disease to ensure that all of our customers really start to understand the results they're getting with their long-read sequencers; and finally, leveraging our infrastructure as we push towards becoming a cash flow positive organization. And I'm happy to report, we made progress on every single one of those fronts this year. We achieved record revenues, our first $200 million year, 56% revenue growth. 173 units shipped for Revio, record consumable growth. This is one of the big questions I had going into the year, is moving from Sequel 2 -- the Sequel 2 platform, which was really not very capable relative to Revio, would we have a problem with our customers finding samples to run Revio, and I'm pleased to report that was certainly not the case at all. And we ended with a strong balance sheet, $631 million in capital, which gives us the ability to keep investing and pushing the growth in this company. Just to kind of look at Revio a little bit deeper by the numbers. If you look in totality of our long-read sequencing portfolio, we have over 700 systems installed at this point in 2023. We saw a sequential growth really starting in Q2 through the end of the year in consumable revenue. And we've had over 10% sequential growth just in the fourth quarter alone. So customers are adopting Revio and they're using their systems, which is so exciting. When we see the amount of data being generated, that's fundamentally changing everything. And I actually think the amount of data, if you look at this chart here, you can see how many petabases were generated just in the fourth quarter alone. That is fundamental to driving the flywheel, because our customers are the ones that come up with the new applications. They leverage the data, and it really pushes the field forward. And so, I expect to see this continue to grow significantly in 2024. But we're also continuing to drive innovation and making Revio even more robust. We launched our first major update to Revio in December, and it added several new features that our customers were looking at. And particularly, I wanted to highlight our adaptive loading capability. So long-read sequencing is new to many people, and so we have to make the process as easy as possible. And with adaptive loading, it makes loading the DNA onto the system easier and more consistent, which gives you better results time in and time out. We also started shipping in December our Kinnex kits. These kits are really RNA sequencing, looking at the whole transcriptome. We can now -- we now have a kit to look at bulk RNA, single cell RNA and also 16S. So we can look at full length 16S sequences, which is really important in microbial applications. In the first half of 2024, we'll be launching high throughput DNA preps to match the sample prep with the powerful capabilities of the Revio system, but we're also launching new native DNA kits that allow us to drive the input quantities of DNA down even further so that we can reach more samples and different sample types than ever before to help drive the growth of the Revio system. And Revio is enabling our customers to sequence thousands of highly accurate genomes. In fact, you can see on this page, several customers that are doing multi-thousand level projects. For example, the GREGoR Consortium, we did that -- we were able to achieve that deal in Q4. They're going to be doing thousands of samples looking at improving our understanding of rare and undiagnosed disease. The precise health initiative in Singapore, where there -- where in the Phase 2 study, they've adopted Revio to drive really a population scale program in Singapore, and we're excited to be part of that. But I'd also like to highlight Children's Mercy of Kansas City where earlier this year, they implemented Revio in their CLIA lab as a first-line test for pediatric rare and undiagnosed disease. This is the first example of this and is really indicative of what's going to come. We've already seen several other customers implement Revio in their CLIA labs, principally focused around rare disease, but really opening it up to a number of different applications. So that's 2023. We're really proud of what we got accomplished. We're really excited about our financial performance. But here we go for 2024. You're only as good as your last year, so they say. Our priorities in 2024 are all about increasing technology adoption and driving scale. In fact, I believe that we're going to place more Revio systems in 2024 than we did in 2023, and that will help continue to grow both our instrument revenue, but importantly, our consumable revenue as well. We're going to build upon that clinical momentum that I was talking about, for example, with Children's Mercy in 2024, continuing to help connect our customers, so that as all of the new variants in long-read sequencing come to light, structural variation, epigenetics, people can collaborate to drive our deeper understanding of the biology, which ultimately pushes more and more sequencing. We'll also continue to drive innovation. We have several new platforms in development. We're going to continue improving the Revio system, improving Onso, but what's really exciting as we are well on our way to building out a multiproduct portfolio, which I'll share with you in just a moment. And all of this is really to help us drive to become a sustainable company, drive towards positive cash flow. This will be focused principally on our efforts to improve gross margins in 2024. And to double click on that just for a second, we have incredible opportunities to drive gross margin up. And I would expect us to be sequentially improving gross margin from 2023 levels throughout the year. And there are several levers in which we can pull. Investors ask me all the time, what are the levers? And some of those are just lowering the production cost of making the instruments. We continue to innovate and value engineer the Revio so that we can take cost out of the system, which will help us drive our gross margins. We have lots of opportunity to optimize supply chain. And so, we're really focused on projects around optimizing the supply chain, improving our working capital, utilization and also driving costs down. On consumables, we have all kinds of initiatives in place to drive gross margins through improving the yield and improving all aspects of the chip, increasing the density of the chips. All of those will help us drive our gross margin over time. And perhaps most exciting is really, as we ship more and more Revios and they drive a high level of consumables, our consumable revenue will become greater than our instrument revenue, and consumables carry a higher gross margin, so we will get a natural lift. So you could see there's a lot of proactive things that we can do to improve our gross margin. And in 2024, even in the first quarter, you're going to start to see some of these improvements take place. But as I said, this is only the beginning. When I laid out the strategy when I joined the company, we were going to build a multihomed, multiproduct portfolio. And we now have Revio and Onso on the market to great reception. But now we're deep in development on a Benchtop HiFi system, and that will be an important product for us to get to market so that we can make HiFi long-read sequencing ubiquitous throughout the community and serve as a feeder into the Revio platform. We're also working on a population-scale HiFi systems, so ultra-high throughput long-reads. And a lot of the core technologies for that system will be finished in 2024 so that we can launch a product that can do perhaps more than an order of magnitude, more throughput than the Revio system. So, we're really excited about that. And then finally, on the back of our Apton acquisition, we're developing a high-throughput short-read sequencer to focus on scale liquid biopsy applications. And that product is in development now, and I'm pleased to report that we're already sequencing over -- billions of reads at Q40 plus accuracy with over 100 base pair read links. And so, we've made a lot of progress in the development on that in just a very short time. And so, we're really encouraged that we're going to be able to bring this product to market really quickly as well. So when you think about -- we didn't give guidance for 2024. We will do that on our earnings call. But when you start to think about our accomplishments in 2023 and our forecast and our outlook for 2024, we continue to believe that we can achieve a 40% to 50% CAGR from 2022, and we used 2022 because that's when we initially gave this long-term guidance at our Analyst Day. We still believe that we can achieve a 40% to 50% CAGR, which would result in greater than $500 million of annualized revenue in 2026. In 2023, we grew 56%. So, we're well on our way. And when they start to think about -- when I start to think about, okay, where do we get to cash flow breakeven, we still believe that we can achieve cash flow breakeven in 2026. So, we won't be cash flow breakeven for the whole year, but during that year, we expect to be cash flow breakeven. We expect gross margins to expand significantly. And so, we've really put ourselves into a position to be well on our way to achieving these numbers. And so hopefully, in a very short amount of time, I gave you some perspective on how the strength of 2023 is going to propel us into 2024 and beyond. Revio is truly a game changer in the long-read and in the sequencing community. We're taking share from short-read sequencing through the Revio system. Onso and SBB chemistry has unique applications, allows us to change the nature of the conversation that we have with our customers and drive in a very unique and specialized way into the short-read sequencing market. There's incredible interest in the company right now, and we're really taking advantage of that by delighting our customers and serving them with the solutions that will change the game for them. And finally, we are very well positioned to achieve our goals. They're ambitious, but we have an incredible team in place, and I'm just thankful that they're part of the team. And with that, I thank you for your attention, and I'll step over to the Q&A.

Perfect. So first off, I just wanted to touch on the pre-announcement that you guys did earlier this week. So 4Q results beat the Street on top line. So can you just walk us through what really drove the strength there? Also, just touch on the macro backdrop? You had called out on your 3Q call that the macroenvironment was getting a little bit more difficult. So how did you see the impact from that? And was there any type of 4Q budget flush at all and the numbers as well?

Yes. Look, I think the fourth quarter was a really strong quarter. It was a record quarter in the company. It exceeded our budgets internally. It exceeded the Street expectations. And it was really driven off of continued interest in Revio and continuing to grow the order book there and shipments. But when you really look at it, the consumables were really surprising at $18.9 million. That was a very strong result and bodes well really. We're almost at a $20 million run rate already as you go into 2024. And I think that really sets us up well. When you think about the macroenvironment, the macro environment still is -- we made those comments on the Q3 call that we're seeing maybe kind of delays in purchasing. And it's not coming from a lack of interest. It's coming from purchasing agents being cautious with their spending. And I think a lot of institutions are still in that mode. When you have a new technology like Revio, that helps you overcome things a little bit, and I think we did that. We also ended with a healthy backlog going into Q1. And so, that always is nice to get a head start on the year. So overall, I think the Q4 strength was driven off of consumables, continued interest in Revio. Our sales funnels continue to strengthen. And so, we see our outlook is really strong for 2024. Of course, in any particular quarter, the number of instruments you place are going to vary. They're going to go up and they're going to go down. And really, that's -- it's really important to take a bit of a macro view. And we firmly believe we're going to ship more instruments in 2024 than we did in 2023, Revios in particular. We believe that Onso is going to scale in 2024. And so, we'll certainly ship a lot more of those instruments. We've seen a lot of good demand and opportunity for that. And so, I do think the macro backdrop is tougher certainly than it's been, but I do feel like we've made a lot of -- we've had strong execution and be able to make -- we believe we're going to make this a strong '24 as well.

And then I wanted to follow-up on the placement comment. Obviously, that's been a key investor question that we've had. We placed 44 Revios in the quarter. That was a modest sequential step down from the 3Q placement of 52. So can you kind of walk through -- if you look at the year-to-date number, you placed 173. Obviously, that's more than the Sequel 2 launch in the first year of launch. So walk us through, how should we think about that placement number and some of that sequential step down into 4Q? And how does that set you up for 2024 as well?

Yes. Well, I think the first thing you need to think about is, you really need to take a broader view of what does the future hold. And we really believe that we're going to ship more instruments in '24 than '23. When you look kind of at the micro level, we had a very strong shipment number in Q3, and part of that was by design. We've been fortunate enough to carry significant backlog throughout the year. And we've been trying to whittle that backlog down. And I've been saying that on each of our calls all year. And in the third quarter, we shipped a few more than -- we shipped a few more, because what we wanted to do is make sure those customers got a head start going into year-end, because we know people slow down at year-end. And so, I don't know if -- I don't believe people should read into fourth quarter versus third quarter versus second quarter. I think they should take a little bit more of a view of, between Q4 and Q3, how did we do, and then what is our outlook going forward, and how does that -- how is the first half of the year. And when I look at Revio placements specifically, in the first half of the year I still think we're going to have a strong placement. But I do think if you look at first half versus second half of '24, Revio placements in the second half of '24 are certainly going to be higher than Revio placements in the first half of '21. Now, will first quarter be higher than second quarter or second quarter be higher than first quarter? That will depend on the situation. But when you look kind of in 6 to 12-month increments, it's certainly moving up and to the right.

Then just kind of sticking on some of the 4Q trends. I wanted to talk about China. Can you walk us through how did China perform during 4Q? What's your updated exposure to the region? And then, how should we think about some of the rebound here just given the weakness that even some of your peers have also called out in the region?

You know what, we've been really fortunate in China, and we actually had a very nice Q4 in China above our expectation. I was worried that it would be a little bit challenged, but the reality is our largest Chinese customer placed a significant multisystem order. We shipped a few of them. We'll ship some more in the first part of this year. But -- obviously, that order was useful, but we are seeing our Chinese customers run at high pull-through levels. So, they're using their systems. The revenue grew nicely during the quarter. And so, we really weren't subject to that. And you might ask yourself, well, why? I mean, the reality is that we have a very concentrated customer base in China, and those customers are principally service providers. So they're the ones that really are the direct sellers into the Chinese end user. And they actually have -- it's crazy because they have -- they actually have a sales force, 2,200 folks, like dramatically different than what we do. And so, the ability for us to kind of be a little bit insulated, because these service providers actually are doing the hard selling, has been something that has, I believe, helped us. But overall, for the year, China did grow slower than we grew overall. So our growth rate -- the rest of the world grew faster than China. China was still healthy growth. But I do think that we're kind of in a unique situation, so we've been a little bit insulated. It will be interesting to see how the Chinese government drives academic funding, because we're still heavily driven from academic funding in China, and we'll see how that goes.

And then, just in terms of 2024, I appreciate that we're going to get formal guidance in a few weeks here. But just, can you help us think of the framework for top line heading into this year, especially in the context of your long-term guidance of 40% to 50% revenue CAGR? Can you walk us through really what are the range of outcomes that we could see for next year?

Yes. Well, as -- I'll reiterate, we're not giving guidance, so no one write this down. But what -- the way we're looking at the market, we do think there's a significant opportunity to continue growing on a global basis. And on the Q3 call, I said, I expect us to grow significantly. I still stand behind that. I have lots of investors ask me, well, what does significantly mean? And so, we will give more specific color on that. But when I think about the setup and the way the framework -- people should be thinking is that the first -- the second half will probably be bigger than the first half. And so, you'll probably see some back half loading of the revenue. And the reason for that would be, we do believe there are several very large projects that are out there. And as they come to fruition, they'll start to actually get sequencing kind of perhaps midyear. Maybe some start in Q1, but for the most part, they'll be ramping up, so that will help drive the second half to be bigger than the first half. I don't think it will be dramatically different than any out of the ordinary. I'm not signaling an extraordinary delta. But I do think you're going to see placement variability from quarter-to-quarter. But when we all kind of look at the end of the year, we should be in a place where we're much higher, where we're higher than we are for 2024 -- or 2023, excuse me. On the consumables side, I think we're going to see a continued ramp of consumables. In fact, we see -- we are working on significantly expanding our production capability for SMRT Cells, the core component of our -- of HiFi sequencing consumable. And so, you'll see that. So, we expect to see strong consumable revenue, which will help drive our gross margin expansion as well. So that's, I think, the basis of the setup, but we'll provide more in February when we do our earnings.