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

All right. Thank you very much for joining us today. My name is Michael Podoll. I lead Morgan Stanley's U.S. life science tools and diagnostics coverage and the health care investment banking group. It's my pleasure to introduce Mark Van Oene, Chief Executive Officer of Pacific Biosciences. So Mark, welcome.

Thanks, Mike. Thanks for having me today.

Absolutely. So congratulations again on stepping into the new CEO role. So as we've gotten settled into the company, from your vantage point, where do you see kind of the clearest opportunities to enhance the company's strategy or execution?

Yes. Well, fortunately, I've been here for a little over 5 years, and Christian and I worked hand-in-hand on really defining where we could build out the portfolio and the strategy for PacBio. So this is not me making a wholesale change on the strategy. It really is what you asked about is the execution. And so I think really making sure that we're really focused on driving into some of these clinical markets where our technology is differentiated, and that's really around germline genomics right now. So think about carrier screening, newborn screening, rare disease. How do we better execute there? And a piece of this is just bringing the commercial organization together to properly drive and go after those markets and seize the momentum that we're starting to see both in Europe and now starting in the rest of the world. And so to me, it's a very execution-focused change more so than a big strategic shift for the organization.

And what should your customers or investors expect to be different? Obviously, execution is a big part of this. But as you think about your 2 or 3 big priorities for the next kind of 12 to 18 months, what are those? And what kind of evidence should investors look for that you're driving that execution the way that you hope to?

Yes. So first, we did just go through some restructuring and reduce some cash burn. And so look for me to land the restructuring for the organization and settle the rest of the commercial and R&D groups back down that have been impacted. And so that's top of mind for me is making sure that we're fully focused on moving forward from the restructuring. And you guys should look for the cash savings next year. We're talking about a $40 million savings between headcount and nonrecurring expenses. And so you should be looking for me over the next year to make sure that we deliver those savings on the operating expenses. From an overall product perspective, we just started shipping our SPRQ-Nx reagents. And for those of you that don't follow us closely, these are reagents that let us reuse the chip up to 3x. And so this multi-use chip really gives us the economics to think about how we can drive gross margin and drive some price elasticity in the market by lowering the price. And so this SPRQ-Nx transition that started in May is really important for us to execute on this year so that we exit 2026 with consumable growth, margin growth, setting ourselves up on Revio for 2027. The other big product, obviously, to execute on over the next 18 months is the high-throughput platform. SPRQ-Nx is giving us the economics to have conversations for large deals that we haven't been involved with in the past. And now people do want higher throughput platform. And so continuing to make sure that we're focused on this piece of the company was not impacted through the restructuring, but focused on driving that high-throughput platform through the development to execute on later on next year.

And maybe just looking ahead maybe 3 to 5 years, longer-term type of time horizon, anything else that you'd like investors to understand about the broader vision for PacBio and how you see PacBio within the broader genomics ecosystem that I think is well known is an ever-changing environment?

Yes. It's been fun for life science tools companies the last 2 years, hasn't it. I'm joking. It's been tough. And I think because of that, we're starting to see some new opportunities emerge that aren't the traditional funding sources for us. And the first is PacBio has been built in the most part from plant animal, nonhuman and some recent, more recently growing human academic research. I think we're here to catch and support that as much as we can, and we will because those are important customers and markets for us. But this drive into clinical is just critically important. And I think we have an opportunity in the longer term, 3 to 5 years with higher throughput technologies with even more affordable pricing per genome to really cement ourselves in the rare disease clinical diagnostics. And I say that because in the rare disease odyssey, it's a bunch of different technologies that are used that we can consolidate onto our test. And so being able to change the economics of the labs that can consolidate tests to be able to change the economics of health systems that are deploying those tests and drive up the clinical evidence and clinical utility of combining those is a real opportunity and publications are coming out regularly now to show the increased diagnostic yield and benefits of using HiFi as frontline. And so if I think about 3 to 5 years, it's making HiFi a frontline genetic test using whole genome sequencing, not just a reflex or not just a subset, but a frontline test for rare disease diagnostics. I also see a big opportunity emerging. There's -- and you're seeing it in the tools companies in our space as well. There's this intersection of AI and health care. And it's data hungry. It's data, the comprehensiveness of our data is meaningful for them. And so I do think over the next 3 to 5 years, you'll see us get funding from more of these AI therapeutic companies and nontraditional customers. And so I think of this as a new category of customers to start to drive the understanding of multimodal data into different models of biology and health care and therapeutics and diagnostics. And so I think that will likely replace academic and government in many ways and it's a real opportunity for us given the quality of the data that we have.

And you mentioned SPRQ-Nx and the rollout there. What are you kind of hearing from your early customers? And how should investors kind of understand what successful adoption might look like?

Yes. So the early data has been really, really encouraging with the SPRQ-Nx rollout. Again, it's only been, what, end of May, we started shipping. So it's only been a few months of getting really meaningful feedback. But the customers are experiencing really good first and second runs, a little bit less yield on the third runs. And so a lot of it is just working through the workflow and the timing and how that will play out in the customers' hands. And our team is fully equipped to have those conversations. And I think the customers are understanding that dynamic a little bit better now. But what they do love is the economics. And so this, we've been able to lower our list price by 30%. That is driving new conversations. That is driving new projects for us and higher scale projects. It's leading to some fleet expansion in cases where now they're getting enough interest that they need to add some Revio to their fleet. And so it is doing what we had expected to do both with current customers and then driving new projects and growth. I think for investors, you should really look at how long does this transition take? You saw an impact in the second quarter, our utilization and the average, not the utilization, but the pull-through per instrument per year came down closer to $200,000 in the second quarter. You should expect that to continue through this quarter. But by the end of this year, I do think this is a 2-quarter transition. And by the end of this year, we should be getting the revenues from the consumable product line back up again and start to drive that annual pull-through back up again, again, setting ourselves up for 2027. The other thing you should start to look for is this is the first product that's going to help us start to increase the gross margin for the company again more meaningfully. And so we have the margin that as we drive adoption and drive utilization of this, you're going to start to see us recover some of the gross margin that we had to hit on last quarter.

Got it. And any particular barriers that you want investors to be just aware of as you go through the earlier phases of this new adoption?

No, I don't think it's a barrier. To me, the slowness has just been getting people to put testing into clinical production. And so it's not a barrier. It's more just getting through that process. Just like we have a product development process for making and commercializing our products. These labs have a commercialization process of taking the testing that are validated in R&D, transfer that to their production or manufacturing sites and training their commercial teams. And so to me, it's just, let's pay attention to the process of getting this going at scale with the SPRQ-Nx in the clinic. But they're on board, they're validating, they're working with us. And now I just think we can do a better job of supporting them as a customer segment overall.

And as you look across the different clinical applications, what do you think is most likely to become the most meaningful beachhead for HiFi? Or how do you think about that?

So it's germline genomics initially. And it depends on where in the world you are. Right now, we're seeing great growth and success with whole genome sequencing in Europe. And the Revio and the sample volumes in the academic and medical centers in Europe are of the thousands of samples, not of the tens or hundreds of thousands of samples. And so we're seeing great success with rare disease whole genome sequencing in Europe. And I expect that to continue and expand across different hospitals within the countries that are supporting that as a frontline test. And I think the nuance here is Europe has already started to transition this to frontline, not reflex, not a subset, but let's make this a frontline test for these different rare disease conditions. And when I talk about transitioning that success in Europe to the rest of the world, it's about getting it to frontline. The fragmented U.S. system and the centralized testing in the U.S. does not afford itself to the same ways of thinking about deploying this as it is in Europe. And so in the U.S., I think the earlier clinical test adoption will likely be carrier screening. We've already seen Quest launched ataxia panels. I expect others to launch ataxia carrier screening panels, more targeted panels in advance of going fully into the whole genome sequencing for rare undiagnosed disease. And I only say that because of the volumes. We can do hundreds of thousands of samples on Revio for targeted approaches. We can't yet do hundreds of thousands of samples well on Revio for whole genome sequencing in the U.S. And so it's getting them started. And so the activity in the U.S. is let's get them started on subsets of reflex testing so that they're scaled and ready because I do think longer term, the higher throughput platform and economics will give us a real opportunity to drive into whole genome sequencing here in the U.S. and Asian markets as well.

Maybe just shifting gears for a moment. As you think about kind of the U.S. academic or government research funding markets, based on where we are today, recognizing there's been a massive amount of volatility here over the last couple of years, how would you characterize the funding environment today from your vantage point?

Yes, it's been a tough few years. Even before this administration, it was hard with the NIH funding for us as grants got smaller and more decentralized and supported the smaller researchers. And so I think we had challenges even before this administration, but it's continued and it's the uncertainty. It's the uncertainty of the timing of the funding, it's the uncertainty of the next round of funding. It's middle of September, I was hoping there might be a flush. I haven't seen a budget flush. I don't know if others in our industry are yet, but I haven't seen, traditionally, we would never count on it or never bake it into our forecast, but love the upside of a budget flush. I'm not seeing that this September either. And so I think it's just the uncertainty. And so we're not expecting any major changes in the U.S. NIH academic environment for us, which is why you're seeing us focus on different sources of funding, biopharma, philanthropy, different types of clinical opportunities. I think the U.S. business was relatively flat because we're growing the clinical business to offset the NIH shortfalls, but it's the reason why we're not growing. Now that being said, we are absolutely poised to take full advantage of that if the money starts flowing again.