Standard BioTools Inc. (LAB) Earnings Call Transcript & Summary

Hi, my name is Yuko Oku and I'm on the life science tools and diagnostics team at Morgan Stanley. Before we kick it off for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. It's my pleasure to host Standard BioTools today. And from the company, we have CEO, Michael Egholm.

Hello, thank you.

Maybe to set the stage, could you provide a brief overview by describing your vision for the company following completion of your merger with SomaLogic at the start of the year?

Yes. No, thanks for the opportunity to just reiterate our vision. We are building a life science tools consolidator here in a very exciting area around mostly multi-omics, but basically taking advantage of all the investments that have been made over a decade here, but all have ended up in subscale companies. So we're building a platform company with exciting high-growth technologies. And we do that by operating as a platform with leverage a team of seasoned operators and then we are anchored in lean, and we are well capitalized with Casdin and Viking been behind us from the journey that we started 3 years ago. We did Fluidigm 2 years ago and then SomaLogic earlier this year. So well underway, have projected $170 million, $175 million in top line for the year, have an exciting portfolio, a lot of good stuff going on and headed towards profitability or EBITDA breakeven in 2026.

As part of the process in integrating the SomaLogic business, you focused on reducing cost structure and mostly recently pulled forward by a year, your $80 million cost synergy target now at the end of '24. Can you elaborate on where the costs were taken out so far and the key focus areas for the remainder of $20 million cost out for '24?

Yes. So just generally speaking, for all of these companies, the technologies, masquerading as companies tend to have too high cost structure and be subscale. We had a pro forma combined of the 2 companies of $250 million for the first half of '23, which is what we use as the anchor point. And so relatively straightforward in that to get to -- that we needed to on our way to profitability. We needed to take $80 million out. We initially said we're going to do it $40 million this year and then $40 million next year. But as we came in, we went to work and already in Q1 were hit by $10 million. We then updated in Q2 that we had $60 million now have the appetite to do the last $20 million. There's no magic here. It's all about applying SBS. So we do standard processes, standard work for everything, and then with Kaizen the processes and take out inefficiencies and so reset cost structures. Most of it is in G&A, but also refine our go-to-market and also adjusting the R&D spend along the way.

You reiterated your confidence and expectations that you breakeven adjusted EBITDA for full year '26, noted you're prepared to manage costs even more aggressively if you needed to, to get there. What additional levers are you confident you'll be able to pull in addition to the current restructuring cost reduction initiatives that you have underway? And what gives you confidence in your ability to execute on these cost savings without sacrificing top line growth?

That's the -- obviously, the magic here is to how do you cut and then still invest. So the $80 million is actually net of 2 years inflation, '24 and '25 merit increases, inflation and the investments we have been making. So the actual cost takeout is bigger. We still invest heavily in sales and marketing, and in research and development because we believe our technologies have a long runway ahead both in the market, but also on those road maps. We have just generally speaking, and I think it's true for many other companies out there. We have a certain technology debt that there's a reason why the technology has never gotten to their full potential and so we are investing and paying down that technology debt till now. And we will hopefully see the growth come here is tough macro. But as we're coming out of that, there's a lot of things that suggest that we will get a healthy growth rate here coming out. And what I've said is that if we don't, I will have to re-question those investments. But again, proof points are that we're taking out $80 million so far of committed to doing that this year. And we'll keep going for more as we Kaizen our processes.

As you mentioned, similar to other peers, you've been experiencing instrument placement headwinds, largely driven by industry-wide constrained capital purchasing. Could you speak to where the instrument order funnel stands today and what kind of visibility you have into it?

Yes. Like everybody else, we face the headwinds -- there's a bunch of sort of global issues going on. But the real headwind we're experiencing is sort of the pharma-constrained spending here in the last few quarters. And no, I don't know when it's -- when we're going to come out of it. I wish I had a crystal ball, but what we're doing is we are investing in building the funnel. And so I'm telling my salespeople if you're not selling, you should be building the funnel. So we're not losing any sales. We just -- it's just harder to get the funding. On top of that, I have a chance or we get hit harder because we are bleeding edge technology so it's more technical sales. They are expensive instruments today. So even more of a threshold to get those order lines. I will say, though, just for a little bit of perspective from '22 to '23, we grew our instrument sales 46%. So I actually created some really tough comps for myself. So all in all, not too unhappy and I hope the funding will free up at some point in time. It has to. Our pharma must invest again in technology and to developing drugs. And it just so happens the technologies we have will actually help pharma develop drugs better and faster.

Amidst the demand softness, you did note some encouraging signs arising in particular markets. Could you give some more details on what kind of positive indicators you're seeing in which markets?

Yes. So without getting overly specific, we had really weak instrument sales in Q1. We did have a sequential improvement, I think it was 40% from Q1 to Q2. And we are seeing instruments moving again from being a tough slog at the end of last year and Q1. Two of the markets wherein are considered hot areas of proteomics and I know we're going to talk a little bit more about that, so I'll just say that. But we're really encouraged on the long-term growth there, the opportunities coming out. And then spatial biology is hard with a lot of interest. We are one of many players, but for spatial proteomics, we are by far the highest data quality and throughput to feel really uniquely placed there.

Many of your peers are also using leasing or reagent rental type of programs to reduce upfront spending requirements for customers. Are you seeing a greater reliance on these types of arrangements in light of the tighter budget environment? And what does the pricing environment look like?

I say, we're bleeding edge. We have very high price instruments. Our instruments typically give resources like 10 to 20x more publication than the peers, and I'm about twice as expensive. So if I could make that argument to my customers, I could probably increase prices further, but that's not how it works. People like to think in having an instrument cost of operating that irrespective of how many papers it leads to. It's kind of crazy sitting on a company that's the way it is. But within that, we have focused on improving our quality, improving our service, again, all using SBS and then sort of building out a road map and then have customers stay committed to what we're doing. We do offer in various countries like connection with leasing companies. And so it's used that I don't know the exact number, but in some fractions of the sales.

Okay. And then diving a little bit deeper into the proteomic segment. Starting with CyTOF XT, could you provide a brief overview of the system and key differentiating features of the platform?

Yes. So CyTOF XT is really it's flow cytometry except we can do it with many markers. There are other technologies that can do that. We're the only one where it's very easy to do. We use pure isotopes, which have no overlap. So it's very easy to do. It's a mass spec, but we actually try to hide that from the customers. So I'm selling a super-duper 50 color detector. If I say mass spec, it's a tougher sale. So there's a complete repositioning. So in addition to be very easy because you don't have to do anywhere, which calls deal respect for all lab, but what -- where it gets really exciting is we're the only one that can do both markets on the inside, on the outside -- inside and outside the cell. So we can see which cells are there. and we can see what state the cells are in, allows us to study inflammation, which underlies most disease. We're the only one that can do that. And in fact, we're pushing this into the SomaLogic service offering, and we're actually pushing in the immune cell profiling as part of that offering.

Given the automated nature of the system, what is the theoretical max pull-through of the system? And what is the average utilization you're seeing on the instrument today?

So I would say the potential is a lot higher than what we currently see, but I think it's true for any one system, roughly for both our site of instrument, the flow instrument and our imager. Between service contracts and annual consumables, it's about $100,000 in pull-through per year. It's not nothing, but it's fraction of the potential. And so just last quarter, we -- so last year, we saw the first product come out on my regime with Hyperion XTi, which was really a breakthrough in speed and robustness. And so of our entire installed base, I have yet to meet across some of most celebrating to upgrade to the Hyperion XTi. Last quarter, we added an update where we put new scanning modes in that's yet again, much, much faster. And as the only instrument of its nature, we have a slight load because we have such a high throughput of 2 cassettes of 20, remote, so you can work for 72 hours unattended remote control. We're the only ones that need that -- the companies we are competing does a slide a day. We can do up to 40 slides per day. So the throughput is astronomical potentially, but it's very new. We only launched it last quarter. So there's a lot more potential than what we're currently seeing.

Okay. And regarding Hyperion XTi given the increasingly competitive landscape in spatial biology, how is this product differentiated from existing platforms on -- such as those from Akoya specifically?

Yes. So you have -- so spatial biology is sort of a broad term, there are really 2 buckets. There are spatial transcriptomics which is worth 10x, NanoString and Vizgen are the big ones that placing a ton of instruments so they're sequencing a bunch of RNAs on there. We do sequencing because it's easy. [ A, C and G, C ] so use in the case of RNA, it's relatively easy to do. We do proteins, which is really, really hard. So we're the only one that can do now 42 proteins at a time all on the same slide. So the big, big differentiator is the throughput but also the signal to noise we are getting. We have no background because we don't deal with fluorescence. And so doing fluorescence is a little bit like looking into the sun and looking for solar flares, and looking our data is like a black OLED TV where the background is literally black, so stunning imaging, but it allows customers to see things that are simply not possible with other technologies at a very, very high throughput. It is an expensive instrument. And so there's some challenge in pushing that into the market, but doing well with it.

What is the speed of the instrument, if you were to use the slide loader and imaging most to analyze specific regions of interest at single cell resolution?

So we do -- like the workflows we're setting up depending a little bit on how big an area we do. But we leased it with a new mode again, taking advantage of the fact that we do all the colors at once, all the labels at once where in 20 minutes, we can get an overview of the entire slide and then zoom in, and then do the analysis there. So throughput would be somewhere between 20 and 40 slides every 24 hours. Again, you have to compare that with similar system that does a slide a day. We're very, very different and super early, but I hope I come back in a year and report of our first accounts that are really using this to the full extent.

Could you provide any early feedback from customers who already used it so far?

Yes, on like specifically on the imaging modes and then the slide loader, game changing is how it's been on. So the Hyperion was actually like the original spatial biology platform. It came out what is now 8, 9 years ago, a ton of papers out there because the data quality is incredible. There were 2 issues with it. It was very slow, and our quality was not great historically. We fixed the quality and now we made the instrument 10 to 100x faster depending on the mode. So it's really game changing. And we're just a few months away probably from seeing the first studies coming out on these and be widely reported. I can't wait to see those.

All right. So turning to SomaScan business. SomaLogic business has historically had high customer concentration, which resulted in large swings in revenues. Can you tell us the approximate proportion of the top 3 customers contribute to your overall revenue today and the actions you're taking to diversify your customer base?

Yes, so we're incredibly excited about the acquisition we did. The merger it goes it, closed on January 5 this year. We see long-term growth in proteomics business and really now beginning to drink our Kool-Aid, and thinking that proteomics would follow sort of an NGS-like trajectory because now for the first time, we're at scale with our 11K assay, which we can show scale. And so to diversify our customer base, we're doing a handful of things. The most important is the relationship with Illumina. It's launching first half of next year, 2,200 NovaSeq installed base out there, and they're very, very competent and aggressive sales force of Illumina behind it. I can't wait to get going on that. So that will be an order of magnitude change. The second thing we are doing is we're actually leaning into our service offering, which historically have depended on any one a handful of customers. It's a blessing and a curse. I don't mind the $10 million or $20 million contract. I love the validation that comes from pharma spending that kind of money with us, but it leads to big bumps. But I'm embracing that. And so within the big pharma. I'm going deeper into the accounts where we have. We're trying to make the leap from discovery to translational where you're now not budget dependent. And then we're only in half of the big pharma there's no reason why we shouldn't get to the orders. And then the last piece, we directed 2 more pieces. We are actually adding additional services to that service offering. So we have a very competent lab in bold at a couple of hundred thousand samples per year. Working with pharma and the whole front and back end, we're putting the immune cell profiling with CyTOF XT in there. And then last but not least, we're making the 11,000 reagents. We're now making them available like similar to antibodies. So a new revenue stream, still were doing early access later this year on that and then full launch sometime next year.

For the single SOMAmer reagent, as you just touched on, what are additional works such as validation studies that's required to provide it as a stand-alone product? And how are you proposing to price it?

Yes. So there's -- let me just say, we will treat it as if it was an antibody, except it's not. So there's a lot of -- we'll talk a little bit about competition there certainly muddied the water. But just to make it crystal clear, a SOMAmer is exactly as specific as an antibody, no more, no less. It binds to a protein a different way. And which means that it's orthogonal to antibodies, and we actually think there is tremendous value for research to want to study proteins. You need orthogonal validation. We're going to -- what remains to be done is, A, that selling individual reagents, we were never set up to -- we actually never set up to sell reagents in SomaLogic. It's a whole infrastructure that's been done in that. And it's not as easy as going grabbing a tube from the freeze and sending it to customers, some on that piece. But then it's actually all the data and protocols and handholding. We're going to share with customers. But we are going to price it exactly like an antibody, the same quantum for the same price and then with an ability to scale up the fundamental difference though between most antibodies and SOMAmer, all our agents are monoclonal, most antibodies sold a mixture -- put a [ monoclonal ] mixture of God knows what, and what they're actually buying to. Every single SOMAmer is a single sequence, monoclonal by definition.

You've also talked about offering a lower-plex format. Are you envisioning a focused target panel sort of like Olink cytokine panel or more like a customizable panel? And do you see the potential to offer it as a kit on your qPCR instruments?

So we actually -- like the Signature Q100 from Olink is we make that instrument from them and strong relationship with Olink, which really will continue here post thermal and the consumable, the integrated fluidic circuit, the IFC, is our consumable that goes to them. We love that platform. We think it's great, and so we get to partake in both ends. We -- at -- when I came in to SomaLogic we actually had a big investment in doing low plex. We did an analysis that showed that we were late to the market and always misguided. So I cut it all the way, closed down the side and clean off as part of the savings we have here. What we do realize is that when you do the readout of the assay now, we do it on [ assay ] and arrays and now shortly on Illumina, but of course, we can do it by qPCR also. And so we're going to enable those workflows not as something we aggressively promote, but more to take away sales objection, which is when you come in and they're like -- but with Olink, I can convert it to antibody assays so at least I think they can. It's not as obvious on our technology, but we're going to make it simple just to take away in objection, but it's really not an issue at scale, but super happy, of course, that I have like the world's highest throughput qPCR instrument in my portfolio.

In June, researchers from deCODE genetic, corrected a Nature paper published last year, noting that corrector data analysis point to higher precision for SomaScan assay versus Olink assays, which is the opposite conclusion from what was originally published. Can you dive into the significance of the correction and highlight the importance of precision RCV?

Yes. So Nature is maybe the most prestige journal in the science world, that paper hurt us tremendously. It was a deeply flawed analysis, all our KOLs, ourselves like letter campaign to get that correction in, and so it's an important thing to do. Our competitors, I think, woeful in the way that they exploited that, I would probably have done the same. But it's just -- basically, the paper stated that Olink had greater precision than SomaLogic when it's, in fact, exact opposite, and that's what the paper restated. We were probably even too timid in how we sort of met that misinformation. It's really the only way of characterizing it. And now we are beating the drums on just how strong our data, how strong our data is there. So very important, I would say.

Has the correction changed or dialogue with potential customers? Do you feel that it's unlocking new segment of the market for you?

Yes. It's still very early. It was enormously important to get out. We lead many presentations just stated and correct. As I just alluded to before, there are a lot of misconceptions around what SOMAmers are, like our former of aptamers. Much of that is actually self-inflected, like from historical SomaLogic on the past. We kept our stuff close to the vest. We didn't share all the data. That's not how the scientific community works. And -- so I've committed to the scientific community that we will be transparent with all our data, including making individual SOMAmers available. But then we have had to fight this objection and then other sort of claims and specificity and other things that are just -- it's for us and now leading. What we historically have done is we've been trying to just add more and more data, which then got misconstrued. And so now we are going out with crystal clear communication on head-to-head studies on how we are differentiated.

Well, going back to that specificity comment, there was a preprint posted on bioRxiv back in '22, which compared Somalink (sic) [ SomaScan ] and Olink platform and found Olink's greater percentage pQTLs versus SomaScan. Suggesting Olink platform is more specific. Given there are emerging concerns around this paper as well, namely specific normalization process used in the study, has there been any other studies that compare the specificity between SomaScan and Olink platforms?

Great question. So actually, the bioRxiv preprint that was then retracted, but I'm sure it distributed to every single customer out there from our competition. And the Nature people, they were linked to the same sort of analysis. We -- like one of the very first thing we did when we were doing the closing and then post-deal closing was once number of direct head-to-head studies, and I'll talk about those in a second. So much more data coming out, but it was just again to stay sort of emphatically. A SOMAmer has the same specificity as an antibody. It's no better, it's no worse. Find different ways and so there's no fundamental issue. Then there is the issue of the assay and they are the sort of a circular logic from my competitors on how to do stuff or just call it circular logic because that's what it is. We have so much data that will now make available on the topic. And then there's this super technical thing about cis-qPTLs (sic) [ cis-pQTLs ], it basically asks for a protein signal you see is the genetic footprint associated with it. And the numbers are in that by bioRxiv paper and elsewhere is just muddying the waters. It's really no different. And in fact, you would not expect that to be a cis-pQTL for every signal you get, okay? It could be a trans effect, the epitope effects, and all sort of biology is complicated, which is why we need to start in. But then on direct to bake-off, it was a paper coming out from [ Joe Coresh ] team at NYU, can bioRxiv, so not peer-reviewed, but that basically show that we preserve our precision in the assay from the very first all the way to the 11k. So it means CV, like mid-single digits. It all shows that for Olink, like the first part of the assay is okay. It's not great, but it's like about 20%. But then as they expand it to 3k and to 5k, they literally fall off a cliff. So 60-plus percent CV on the last few thousand, which random noise generated. So basically, the main reason for the CV is that they're not really detecting protein. So we use this is as the evidence that we have a platform that can scale. And in fact, we're going to go beyond the 11k, so we cover so much -- you probably don't need to cover the whole proteome, but we'll cover enough of the proteins to pick up signals. So very exciting times. And then as I said, we sponsor multiple studies. So I'm actually aware of additional studies. So this is not a one-off. So take out the popcorns and stay tuned for more updates.

Fair enough. And you talked about the partnership with Illumina to -- that should help you diversify that customer base. You're currently in early access for SomaScan advocates you're developing with them, and with broader rollouts expected in the first half '25, tell us any other feedback you heard from early customers so far?

Yes. So Illumina does a couple of things. First of all, we have a very strong relationship as a really strong partner. I couldn't think of a better partner than leveraging their installed base, 2,200 NovaSeqs and a really good sales force. I know I competed with them against many years ago and lost, okay? I couldn't actually think of a better team. What -- in addition to getting it out much more widespread, it also comes in at a significantly lower cost and reading it out on a rate. And what we've seen here in the first 6 months is we've gone from where there was considerable technical risk, the technical risk is essentially retired now. It's not as good as array, but it's close enough. And because it will be a distributed solution. And again, I can't talk to the pricing because I cannot discuss pricing with Illumina, but presumably at a lower cost point, leveraging an infrastructure, it will really be a game changer. So I view it as like an orders of magnitude change in reach. Maybe just as a data point, we have 19 authorized sites. The last number that's out from Olink before they got swallowed up by Thermo was they had 120 sites. So there, you see the difference. And now really excited about the rollout and early feedback, just to answer your question, it's been very positive one.

You also have OEM agreements with Olink. And now that Olink is part of Thermo, do you anticipate any changes in cadence of revenue contributions? And have you had to restructure the existing agreement as a result of this transaction?

No. We have a good relationship with Olink. If you ask the old Olink management team and I'm sure if you ask the Thermo guys, they will tell you we've been a very strong OEM partner. It was one of the very first things fixed we came into Fluidigm. We fixed the relationship with care quality, delivery issues and all that stuff. They have put out 200 to Q100 instruments. They're all consuming our proprietary consumables. Even if they stop selling today, I would still have a long tail. I'm not aware of a technology that they have that could replace it. If I was them, I would try. I know how big companies work. And maybe in a couple of years, they do, but I'll have a very long tail of our proprietary solution. And I can assure you that when Olink picked Fluidigm as a partner, it was not their first choice, okay? It's the only choice for what they wanted to do. And this sort of a lock-in with the technology.

You also have a healthy balance sheet with almost $400 million in cash. With M&A as a key priority for you, how do you view valuation levels that are currently out there in the market?

It's tough on the whole VC funded and it's tough in the public market. It's not a lot of fun right now. But the whole tool segment is sort of having an existential crisis as it comes to funding. Some of that is beginning to bleed through to the valuations, but there's still some cost fallacy and I got in at X, and I can't do Y. But we're seeing increasingly people realizing the longer the way the tougher the medicine will be. So we are seeing a very rich pipeline and a set of opportunities there.

And is there any areas of the portfolio you'd like to fill potentially be an inorganic means and size of the deal that you would consider?

Yes. Now -- so we've done 2 transformative deals already. I hope to do more of those as we go along. But I'll give you a somewhat flippant answer. I'm looking for good businesses. So I would love to buy something that's not in need of repair, that would be a little bit easier and with good gross margins where I can leverage my G&A and sales infrastructure and -- so the SBS management principles. So transformative deals and then add-ons that are good businesses. I already play in maybe the 2 hottest areas, proteomics and spatial biology and whatever else we add should be in the future growth area.

To wrap up as you look out over the next 3 to 5 years for Standard BioTools, what do you envision for the company? What areas of the business do you see with the greatest growth opportunity?

So we do new cell profiling, we do spatial biology. We do plasma proteome, so exciting areas. I think we're beginning to be recognized as a player here from coming out of nowhere just a couple of years ago. And we want to be known as the company with the most exciting portfolio and be the acquirer of choice for great technologies.

Great. That's all the time we have for today. Thank you.

Thank you.