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

Well, thank you, everybody, for joining us after lunch here and post-market close. We're lucky to be hosting Standard BioTools, Michael Egholm, CEO of Standard. Thank you for joining us.

Thank you, Dan. Happy to be here.

So a number of questions I want to run through.

We have -- we just closed third quarter earnings, so it makes sense to talk about that. You have a disparate product portfolio, so I want to talk about that as well. But if we could start just talking about the origin story of Standard BioTools. What are you looking to create? What are you looking to build?

We are on a mission to build a next-generation life science company out of a number of exciting technologies. So it was really formed from Eli Casdin of Casdin Capital and myself, a long, long journey in the life science industry. I've developed a number of products, 454 sequencing, as an example, was an operator at Danaher and last set up and ran Danaher's Corporate Venture Fund. And from that, saw all these very exciting technologies that all -- almost all failed to scale. And so we saw this enormous opportunity that let me leave out at Danaher 3 years ago together with a team of ex-Danaher operators being well funded to begin a mission of true M&A with strong investors in our back to begin to piece together a portfolio of these exciting technologies. And we did Fluidigm 25 years ago and SomaLogic here in January through a number of transactions here. And so now I have a portfolio of super exciting multi-omics product that all will serve from long-term growth, $170 million, $175 million in revenue for this year, a healthy balance sheet and an OpEx that we are getting control over on the path to profitability in 2026.

Okay. Well, I want to double-click on that, though, because you didn't set out to build a publicly traded venture capital firm. And so what was it that you noticed in these technologies that we're looking at, that was inhibiting their ability to scale? And what do you hope to bring to the table to debottleneck that?

Yes. So the hypothesis was really what we term like this year were in the boardroom over and over again, you spend years developing a technology. And then when it's finally working, there's a little bit of traction, you inevitably hit quality issues, manufacturing at scale to attractive gross margin, building a sales force and then beginning to do this in a sustainable way. So what we brought to it was this, like, as I said, many of us trained at Danaher for many years, but you can take good operators from many other companies. And have really disciplined operation and then all deeply anchored in lean and just working the problems one by one, getting the OpEx right and solving the quality and the delivery performance. Just a little tidbit of an example that we shared in our Q3 earnings call from when we took over Fluidigm here 2.5 years ago to now, we went from on-time delivery of 78% to 98%. It's really felt by the customers. And it's also actually allow me to have a lower inventory, plan better, also straight out of the lean playbook. We reduced the downtime from our highest selling instrument fourfold. That means we improve the quality or cut the problems in half twice and still on that journey. So sort of maniacally you work through all those issues at the same time as you get clarity on the strategy and constantly building the portfolio as we most recently did with SomaLogic.

Okay. Well, I used to cover Fluidigm. So I'm going to mind those anecdotes in a moment. But before we get there, let's talk about Q3. What were some of the key themes from Q3 results in your view?

Q3, solid execution across the board from my team. We got back, get a handle on predictability of revenue. There were a few pieces we saw that really gave us a lot of encouragement with -- so return in the SomaScan service revenue and beyond the top 5 customers that we have -- top 5 pharma customers we have that give us a healthy headwind. We have said $15 million to $20 million versus 2023. But underneath that, we see a very healthy growth in the SomaScan assay services year-to-date, not just Q3. Likewise, our authorized sites are pulling through healthy consumables contributed to what was a 13% year-over-year growth on the consumable line. And we're seeing Illumina advancing the partnership we have, and I know we'll probably talk more about that later. But all in all, give us increased confidence in the commercial runway we have for the SomaLogic enterprise. On top of that, over the last few months, there have been papers published and even more presentations have been out there showing that versus our major competitor in affinity proteomics, we can scale and they cannot. So we feel really bullish on the future of our proteomics enterprise.

Okay. And remind me why is the headwind from your top 5 pharma customers in SomaScan?

Yes. So it's actually beyond that there's this pharma headwind that we all suffer under right now. Here, it's simply a year-over-year. So historically, SomaLogic, some years, our top 5 pharma ran big projects. It just happened to be a very good year in 2023. And so simply just they had planned projects, they run them, they have to digest them. And so I just have a tough comp in '24 on top of everything. It was, of course, fantastic when we had them, and it's an incredible validation of our technology that you have major pharma companies spending $10-plus million on a study. They obviously think that they get value for their money.

What is your view of the current operating environment from a demand perspective beyond standard biotools and academic, et cetera?

I've been doing this for a long time, at least 3 decades. It's one of the toughest slots we've been in sort of as a macro. We did really well on instruments last year again. So you do well 1 year, creates a tough comp for next year. So we did 46% last year growth in instrument. This year, we are down year-to-date, 28%. We are seeing constrained CapEx environment. It's really broad-based, but pharma and biotech spend is one of the drivers. We do see -- in U.S., we're actually doing okay in the U.S., sort of broadly outside those accounts. But we have had weakness in both Europe, Korea and Japan for years. And now China has caught up with us here in the last couple of quarters. We've built -- we're rebuilding the team or have new leadership, sales leadership in both APAC and EMEA within the last 3 months. We're still very bullish on the long-term potential for the set of technologies we have and the technologies we're going to acquire. We just have to work through this slot now here. The way we -- and I don't have a crystal ball. I wish I had. In all my one-on-ones get asked when it will return, I don't know. What we do, do that maybe a little bit different is we have this monthly operating cadence, very -- so we know where our business is on a monthly basis down to every product line, full P&L, et cetera. So constantly evaluate where we are. And then we are looking at where we are now, is this the new normal or we're going to get a complete rebound in sometime in Q1. And we're constantly titrating our sort of forward spend against those two goalposts. Obviously, I hope this was all a bad dream who wake up in January and everybody begins spend money again, but that's unlikely. So we're going to be somewhere between where we are now and a full return is our best guess.

For 2025?

For '25, yes.

Okay.

Again, as I said, I evaluate it on a monthly basis. So it may change.

Sure. Has that opened up anything incrementally from an M&A opportunity perspective?

Yes. Most definitely, we are sort of broadly speaking, we're cultivating 100-plus targets at any one time. I have seen -- and actually since day 1 from 3 years ago when I left Danaher and began this journey here with my colleagues. And over the last couple of quarters, we have seen -- there certainly already last year, strong interest in joining forces with us. And seeing the value in it, we have really seen a material shift in valuations, like realizing that -- and we are increasingly realizing that we can find highly, highly valued assets at deep discounts, partly because of whatever was not done right and partly because of the environment we are in, the appetite for investors to keep funding companies, even companies that highly valuable assets that have a future, that appetite is still low and is our opportunity.

I'm surprised to hear that because the competitor you mentioned earlier didn't go for a low valuation, and that was a recent transaction. So I'm surprised to hear about the expectation reset just given there were a couple of comps that were pretty healthy.

Yes. I'll pick my words carefully now. But -- so Olink was acquired by Thermo for $3.1 billion. And I obviously don't know why they did it. I used to be the CTO at Danaher, know a little bit about how big companies look at assets like that. So it was a healthy grower nearing a couple of hundred million in revenue in an exciting market with long revenue potential and they were near profitability. SomaLogic, on the other hand, much better technology, but -- and which we now know it's been documented in head-to-head studies, but we never had a distributed strategy. We actually had a couple of years where we withdrew from the market. And so have a distributed strategy now, and we have a partnership with Illumina that's going to come up with a distributed solution that's going to be much more broadly available here starting next year. So I love that $3.1 billion benchmark for a $200 million proteomics business near profitability, which is more or less what we are aiming to be here within too long.

Okay. So is it the near profitability aspect of that, which made that such a valuable target in comparison to what you're looking at? So I'm just trying to understand, are you looking at the ones that are still far from profitability? And so what you can bring to the table is an acceleration of that path, and therefore, they might be below the radar of a bigger company?

I think just back on the Thermo acquisition of Olink, again, the Olink team built a great business, getting a high grower in that's near breakeven is something the big companies can wrap their heads around. An asset like SomaLogic that was burning a lot of money at the time, but still have a lot of potential, big companies cannot wrap their head around. Likewise, when I look in a much, much smaller scale, looking at assets, I cannot -- assets, I cannot take on a high burner. So I got to believe that there's long-term value in the asset, that gross margin can grow and that I can get the OpEx leverage, very much like the big guys, but I have a little bit of a different horizon than I can take on smaller assets. Again, the big guys could easily do that. It's just not worth for them to getting out of bed on. So when you have a -- it has to be relative to your top line, you look at those assets.

Got it. So that's the distinction. It's not that you're looking for fixer uppers. It -- you're willing to look at smaller targets that would be below the radar, if you will.

Yes. I would love not to have fixer uppers. When we went on this journey, we really viewed Fluidigm as a chassis publicly traded company, manufacturing, global footprint, legal, commercial infrastructure. And it had a number of really good products that we are now well underway with. So maybe just give you one example of that. So we found inside Fluidigm, the legacy microfluidics business.

The BioMark.

Yes, the BioMark enterprise. It's a little less than $40 million in revenue. it's accretive on a contribution basis. In '22, we lost $25 million in that. So we took our playbook. We streamlined it, went from five instruments to one instrument, in-source instrument manufacturing, fix the manufacturing of this highly valuable consumable the IOCs. And so we're very clear on the sales and marketing expense, we did and preserve the core of R&D so we could still enable future OEM deals. So we have one with Olink, one with -- now Thermal, one with next-gen diagnostics. We're working on more. So just executing that technology. So it was a lot of work to get it. SomaLogic, beautiful technology, truly scalable proteomics. And it was more of a strategy shift and then an OpEx shift. But the assets we're looking for are like highly valued assets, but that are discounted for one reason or another. We have a very -- even though we talk to many, we very carefully assess whether or not this can add value to the business, try to -- like one thing we probably underestimated with Fluidigm was the technical debt we had, and it took us a little longer to fix many of these things. And so that has trained us here.

You said technical debt.

Yes.

I haven't heard that term before.

So like we -- again, like the instrument I mentioned where we had instruments that customers love the quality of the data, but they weren't performing. So they had a fair amount of downtime and it turns out that's not very good for business. And so we just worked through a number of issues. And these issues can all be traced back to like not having fully developed the product, the proper design and all these things that mature companies know a lot better than the start-up companies. So older expected. It turned out to be some heavy lifting. But again, we're a learning organization and now we use this mindset of finding this valued asset that we don't add a ton of burn to, but we'll make the investment to make it accretive and without hopefully excessive technical debt.

And on that Fluidigm example, you said that the $25 million loss on $40 million in revenue. What does that loss go to over time? It's 0, those numbers.

Yes, on a contribution basis, still -- we're not paying for the G&A yet, but it's [indiscernible] and we know those numbers because we're actually breaking out those two in our segment reporting. But it's a nice little bow to just put on that. It's still -- it's mid-single-digit decline over the last few years. We actually think we're going to bring it back to growth. But I would rather take that and not lose $25 million. So $25 million more I have to spend this year. and set it up for growth in the future.

Okay. The challenging instrument comp you mentioned for 2024, is that against the Hyperion launch in...

Yes, it's actually both the -- we don't break out the different instruments. So we think in consumables, instruments and then field-based service and then assay services, how we report it out. And so we grew instruments 46% in '23, both across microfluidics and mass cytometry, both DXT and Hyperion. But it is the big instruments that got a headwind. We sell -- our biggest instrument has a list price that approach $1 million. Those are hard to move. It's amazing technology. It can do what no other technology can do. It's heavy lifting to sell these.

What's the total addressable market for a technology like that with $1 million price point?

That is a great question. So the way we -- let me sort of sort it out. So there's flow cytometry, our instrument is more like in the $400,000, $450,000 and the ASP on the Hyperion is more like $700 and change for spatial biology. But in flow cytometry, depending on how much of the diagnostics you include a couple of billion dollars and then the high plex, maybe 10%, 15%, but growing more. And there, we are competing with Spectral Flow, which are now a number of instruments that can do. And so growing part of the [ Hyperion ] market. We still like our technology a lot because we're the only one that can truly study T cells and study inflammation, for a number of technical reasons I don't want to go into. And so what we're doing in addition to supporting our installed base, we're also leaning into our service offering. And so we added this Omics-as-a-Service, where we do our SomaScan service team, which is very proficient in doing a high number of samples. For pharma, we have a clinical support team. We have now added our immune cell profiling, which is what we call the CyTOF service. And we're leading with the service and leading with the value prop on being able to study T cell and truly understand inflammation, which is essential for most diseases. So a way we have pivoted and then we're supporting the existing instruments. So that's one way we are all coming that. On the spatial biology, there have been a little bit of -- there was a ton of excitement a year ago, VistGen, NanoString 10x all reported selling a very, very high number. That's all transcript profiling, so doing RNAs in high numbers. We don't do those. We do proteins, which is where biology live. Their cost point is $5,000 to $10,000 per slide over a couple of days. We are like $500-ish in an hour or 2. So very, very different price point. And there's the CapEx headwind and then people now stop and say, "Hey, we can't afford to do that. When we talk to pathologists about where is the future market, 99 out of 100 pathologists would tell you need to study proteins. And that's what we can do better than anyone else and at a higher speed. But the market is finite with a $700,000-plus instrument. Needless to say.

Do you talk at all about -- and maybe you don't because you mentioned the pivot to services, but do you give away figures around what is your installed base of CyTOF of what sort of pull-through per box are you able to generate with that instrument? Just more with the unit...

Yes. So we -- when I took over, we sort of went away from like instruments by instrument, line by line just because a law of small numbers, it will vary from quarter-to-quarter. Investors tend to over-index and over-interpret. So I just keep it at these like consumables, assay services, field services and instrument buckets. But just to give you a sense of it, about 500 CyTOF instruments sort of various flavors out there active today, pull-through, a little like $80,000 to $100,000 per year between reagents and service contracts. And we're obviously pushing hard to develop more application and more pull-through for the Hyperion XTI, our newest instrument, which there's only some handfuls of out there in the wild, that has a throughput that's at least 10x higher than the legacy instrument. And so over time, we'll hopefully see a very different pull-through.

Okay.

And then on our genomics side, 400, 500 active instrument plus the couple of hundred instruments that Olink had put out there, all pulling through our proprietary IFCs somewhere north of $50,000 per year on that. So very healthy pull-through for such a small instrument.

That's 400 to 500 active across the entire fleet of what was the former Fluidigm?

Yes.

Which was probably at least 8 different instruments, if I remember.

Yes. So mostly counting the Biomark HD, Junos and now DX9. But all the ones that still -- we did a massive rationalization of the products down to box, well made.

Okay. So the access array, the C1, the EP1...

They're all gone. It was interesting because when we did it, everybody was like the world is going to go under, but -- we're not losing $25 million a year anymore, and we're on a path to growth. The Biomark X line can do essentially all the things all the other instruments could do. So like in a better package, but more importantly, a more robust instrument that's well supported and that we actually have margin on.

And then talk to me a bit more about the transition of SomaScan from a service model to more of a product model.

Yes. So we're not -- so historically, again, the difference between Olink and SomaLogic. Olink moved to a distributed model and executed flawlessly. We withdrew from the market and then we open up again with a service model. So most of our revenue is a service model out of our lab in Boulder. We're going to keep that, and we actually think it's a hugely valuable asset that will serve as the cornerstone of our Omics-as-a-Service. We have, call it, a little less than 20 distributed sites that we set up and are running and that we're pushing kits through. And then now Illumina is going to come up with a solution, what they've said publicly, which is what I will repeat, first half of next year. And I see this as a dramatic accelerator. It's 2,200 [ NovaSeqs ] out there, various flavors, I don't know, 1,000 sites, something like that, that the Illumina force can now go -- sales force can go promote this workflow and then using the sequencing as the readout. We think it's -- will massively expand the market, in particular, because we're now seeing, we scale to 10,000 proteins, maintain our very low CV. And now in a meaningful way, you can actually do proteomics at high scale, which has always been the dream since the term was coined 30 years ago. Now we can do 10,000 proteins with precision. Again, nobody else can do that. And so with that tailwind, we think Illumina is going to do really well and sort of really expand and complement our service and our authorized sites.

What do the economics of that look like for you?

So the basic way that the deal work is we will sell them kits for the first half, the second half, which is the sequencer readout they will do. We will get a royalty, not disclosed. Illumina does all the sales and marketing and support for that. So technically, it will be sort of an OEM-like relationship, but it's much more than that. We have a deep relationship with Illumina, and we certainly see the growth that they're going to drive, we actually think is going to drive growth. The other part, like the high-end service business directed at pharma. And then the other little thing we did here last quarter or not so little thing was we took each of the 11,000 Somamares that go into that kit and made it available on an individual basis. It's not a full-fledged e-portal yet. But now as our customers going out, this is expanding, Illumina will obviously create many more customers. What's the first thing you want to do when you find 25 new proteins that are hit. You want to do pulldowns, you want to do mass spec. figure out the various proteoforms and all this. It opens up. There's many layers of growth synergy here. So I should caution or as excited as I may sound about this, and I'm truly excited about that expanding market. It's new. It's new to the Illumina force. We've been doing this for many years. It always goes slower in the beginning than you expect. But long term, we see it as a real material growth driver for us. Okay. And once we launch, we'll share a little bit more about the economic details there.

Well, the minimum royalties are public. And so I'm just trying to understand, so it's a royalty plus a kit sale. So those are the two aspects. And the kit sale is a kit sale to Illumina, right?

Correct.

And that's a negotiated price as part of that arrangement.

That is correct, yes.

Okay.

Again, we certainly -- the minimum royalties will be nice. We certainly think the opportunity is far greater than that long term.

Okay. So I shouldn't use that minimum royalty figure as an anchor to think about when thinking about your -- the annual opportunity for Standard BioTools. I shouldn't take the term of that royalty minimum and divide it by -- or I shouldn't take the number and divide it by the term basically.

Correct.

Would be your advice. Okay. And I know that's an early access right now. What are sort of the key kind of milestones that are gating full commercialization from your perspective?

Yes. So without being overly technical, the Soma is a set of pieces DNA, would you end up reading out the number of somamaers corresponds to number of proteins that were there. They have to go through a series of step to convert that into sequencing readout and it's simply now just the work of finishing this for our -- what is our 11,000, and they said 9,000 or 10,000 are going to make it into that. So that's the gating item. There's a workflow. I'd just say when we announced the deal last October and even early in this year, I still saw considerable technical risk to the approach. The Illumina team and our team have worked closely together, worked out all the [ things ] and now we see it actually as good enough raise sort of like the gold standard with a CV of 5%. But what the Illumina team have been able to do is to get it into the single-digit range, like, call it, 9%, maybe it will get better. But we know that our aforementioned competitor has been successful at CVs of 15% to 20%. So we now know that this is good enough. Again, with having a solution that's massively distributed will be a huge advantage in the marketplace long term. And I think there's a real desire to go and do proteomics. So when you survey 10,000 proteins, you learn more about that patient or that patient cohort times 10 than you would with genomics. I don't want to put Illumina as the rest of the business, but proteomics is very, very powerful predictor of disease state and progression of disease, far, far more powerful than genomics.

Illumina is excited about the product, too.

Exactly.

I think you're on the same page.

We are, yes.

Has that -- so from a deal announcement in October '23 to where we are now with the product and early access. And I think you've actually -- you've done something financially to reflect that. I can't remember exactly what, but when I look through your filings, it was some asset was created or something like that. Like -- Is the wind up here is the project on time. And I know on-time delivery and on-time R&D projects are a thing with you. So how is this trending versus your traffic light dashboard of green, yellow, red?

It's living up to my standard of on time, on spec, on budget. So I couldn't ask for a better partner than Illumina is. But it is an obsession with my team to be on time, on spec, and on budget.

And then just final question here. We've talked about the adjusted EBITDA progress in your genomics business specifically, but any comments around the broader enterprise and the progress you're making on adjusted EBITDA?

Yes. No, thank you. So maybe forgot the biggest punch line was that we had said when we did the deal a year ago that we're going to take out $80 million. We declared a couple of weeks ago, we already operationalized that. Most of that is already flowing through the P&L. So our adjusted EBITDA loss was cut in half year-over-year from Q3 '23 pro forma to Q3 2024, cut by 50%. It's really nice to see all that heavy lifting. Several of the actions still have to flow through. There are some reinvestments in there also, which is not a like-for-like, but really good to see it flow through this quickly. And glad to have that heavy lifting behind us.

Okay. Well, with that, we've used up our time. Michael, thank you for joining us today.

Thank you.