Good morning. My name is Blanka Porkolab, and I sit within the European MedTech and Services Research Team at Barclays. I'm very fortunate to have with me today Gordon Sanghera, Chief Executive Officer, and Nick Keher, Chief Financial Officer at Oxford Nanopore Technologies. Thank you both for joining us today, and a warm welcome to those in the room and those that have joined us online. Jumping straight into Q&A and starting with the group's outlook: how much of the top end of this year's sales outlook is dependent on these larger project wins that you spoke about at Results last week? Could you get into the top end without any larger wins?
Nick, would you like to say something?
Yeah, of course. So the important thing to recognize with the guidance that we've given is we can get there in a number of different ways. So taking on board quite a bit of feedback we've had during the year and bearing in mind what we've seen in Q4 and the start of Q1, we want to try and set a cautious guide for the year ahead of 20%-30% growth, but also be able to get there in a number of different ways in case we see headwinds during the year. So it isn't just all about those larger project wins, which I'm sure Gordon will go into in terms of those 5,000-15,000 population screening programs. It's also about just our underlying growth rate, making the most out of the commercial infrastructure investment that we've actually made during the year.
To put that in perspective, our direct sales footprint, the number of heads that have got a target on them, has nearly doubled since the beginning of 2022 to the end of 2023. But the revenue per head has come down slightly because we've seen that dilutory impact. If we go back to the 2022 level that we had as an average revenue per head, we should actually be seeing revenues not just comfortable for this year, but actually the year after. So there's a lot of things that can support that number that we've actually got in the market. Device placement rates, we've looked at what we exited the run rate at last year, Q4, made some cautious assumption against that figure for the projection for this year going forward.
So that if we see better, the tailwind against that number, that could get us to the top end on its own, as well as utilization rate by device and just getting the most out of our installed base that we have today. And clearly, we have these larger programs you've talked to, and we've got a number of them we're looking at, which we can't go into too much detail on. But they're difficult to predict because even though we can win them, they may not start on time. They often can be delayed. But if we did win them and win them all and they all start as they should, then yes, we should be quite comfortably above that top end guidance.
Okay. If the company were able to achieve that 15% constant currency growth rate, could we see gross profit above the 57% for the full year?
So there's a lot of moving factors on this one. The gross profit and growth, what you're actually more likely to see is that the faster we grow, potentially the bigger the headwind to gross margins in the near term from just a mix impact. One of the things we saw last year is the more devices we place, the lower the gross margin will be for the group overall because of the dilutive impact from placing those devices, particularly for those starter and project packs for the larger devices. Then for those larger customers as well, because they've got a different pricing mechanism and structure, you're going to see a different gross margin for those customers as well in the near term whilst we do some technology fixes to try and make ourselves even more efficient for those customers as well.
So, for the top line growth, if we get there without those larger project wins and it's about device utilization rate going up, which is entirely possible from where we are at the moment, then yes, the gross margin should be higher. If we get there through what we've guided to in the 57% is projecting forward a potential impact from those dilutory contracts and from placing more devices. So we think we're trying to capture the headwinds, and hopefully we can do better.
Yeah, I'll just give you one. In the medium term, we have design changes. There's a lot of manufacturing innovation. We've built this product from the ground up. The factory was opened in 2018. We have automation, and we have economies of scale that feed into the medium term. So taking a hit in the short term to place a lot more P24s and P48s leaves us in good position in the following years where the margins go back up because it's consumables only. So you take your hit on the starter pack as you seed the market and build on it. And strategically, we've said our growth, most of it will come from P24, P48. So it's a conscious decision to take that hit because in the out years, you see much higher margins because it's pure play consumable revenue, which is higher than starter pack plus consumables.
Very clear. Could you talk about the likelihood of having to adjust prices down again on your flow cells in the future to stay competitive on price relative to peers? Do you see this as a risk?
So I think in the last 10 years, we've made no price changes. And what we've actually done is rather than see it as a price, it is a price reduction, but it's an alignment across the portfolio. So we have MinION, Flongle, MinION, GridION, P24, P48. When we introduced P2, we wanted to bring it into a pricing point that is accessible and affordable for people to do high throughput sequencing without having to buy an over-spec. Bringing that in line then meant that we wanted to bring MinION, GridION prices down because that then fits in with designing your experiment, your throughput, and price points. Otherwise, you have this kind of weird higher price for the MinION. And it's the right product for certain customers who would be picking up P2s potentially and underutilizing them. It's really important to get that balance right.
In doing so, we have brought the high-end, lower volume pricing on MinION down. But I'll reiterate, our medium-term goals in manufacturing innovation, reuse, and all of that will bring those margins back up. So it's not a price pressure on being competitive for sequencing. The cost per gigabase across all of our platforms is already competitive. It's just having a continuum from 1 gigabase on a Flongle to 1-200 gigabase on a PromethION and everything in between, kind of marrying up a cost per gigabase in the marketplace in a continuum that fits our portfolio and our customers' requirements.
It's also worth noting as well, as part of that pricing realignment, we did increase the prices on our P24 and P48 devices for the starter, now project packs as well. I think that's always people always look at the downward revision on the low volume item, but they maybe miss what actually we're doing there with the P24s and P48s, which is where we've increased the price.
Got it. How much of the growth outlook do you think will come from potentially taking share from the short read sequencing market versus expanding into new territories with the long read sequencing?
Sure. So not many people get to bring a sequencer to the conference because of the uniqueness of what we do, which is to actually read native DNA. So we're not making a PCR copy. There are applications in the short read space, in the existing competitor space. So for example, on liquid biopsy use cases, and we can read short fragments, long fragments, and ultra-long fragments. We do any read length. There isn't a challenge for us. But if I just talk about short fragments, liquid biopsy examples, there is already. We only launched short fragment mode a year ago. There's some amazing publications that when you read native liquid biopsy circulating tumor DNA samples, you can see methylation. And also, it turns out circulating tumor DNA isn't short. It can be 300, 609, 1,600 bases long. So the size of the fragment, fragmentomics, is becoming important.
So we will take market from short read sequencing where there are benefits. That's riches in content. The other is real-time, near the point of care. So at Guy's and St Thomas', they are screening patients in ICU for respiratory infections and turning results around in four hours over four days. So there's a whole range of things on the existing markets. But then the benefits of long reads and being able to close out complete genomes and look at things like structural variation, which is really important, and neurodegeneration, copy number variation where you have repeat regions, things you cannot access with short reads, those are obviously really important. And about 30% of all human disease is inside those long reads, which are often referred to as the dark genome. So that is obviously clearly an area we are pushing very aggressively in cancer, in human, and in infectious disease.
Got it. I guess, could you lay out in terms of the all-growth assumptions for consumables in 2024 and the visibility into that as you add up the different projects that you see going on?
Yeah. So again, it really depends on the mix profile of what happens in the year. But for a useful guide, from the 2022 cohort of customers that bought P24 or PromethION device, they ended up buying 1.1x-1.5x the same amount in consumables the year later. So if we weren't to place another device, then actually you would see our gross margins increase quite materially and you'd still see some growth year-on-year. It's more about actually how many of those devices we end up placing, about what that mix profile for consumables will be. But as a guide, that broadly 75% of the business being consumables is something that people should keep in their head moving forward.
In the near term, for 2024, it may be a little bit lower depending on how well we do at device placements, particularly with some of those larger contracts that we look at because they can take quite a number of those P24, P48 devices in one go. Sorry, it's a little bit vague because there are a few moving parts to the model, essentially. It depends, like I said, how we think we're going to get there.
Could you please provide us with the latest on what is happening in China and the NVIDIA GPUs? Are you able to currently ship there at all? And how confident are you in the workaround being successful in the second half of the year?
So the regulatory compliant version is just putting the compute and the box together. We've done that, and we expect to start shipping in the second half of the year. And so when we're looking at procurement and sales cycles, we already have that solution. And it's in the factory being built, ready to ship. So we expect that just to be a smooth roll-out. And it removes the need for the complexity of additional licensing that we have to go through. That just goes away with that compliant, tethered platform.
Okay. And what is the funding environment like currently in China? And how does that compare to last year?
China is challenging. I think there are three clouds that we have to face. One is the compliant box, and there may be other increasing regulations that come out. The second is there is just an economic slowdown in China. And the third is genomics is one of the areas that China has said customers must look to domestic industry first. Nanopore kind of is impacted by that because the sales cycles are longer. But we do tend to get through that one. But those three together make China specifically a challenging market for us. The rest of Asia Pac is really vibrant. And we note that some of the peer groups are starting to split out China, which is quite useful for us to see. And we may move to do that, but that's still an ongoing debate internally.
Got it. Let's talk about your applied market partnerships and how those are progressing. Could you share the revenue generated in 2023 and what your ambition is for 2024?
So we have partnerships with bioMérieux on infectious disease. Just a few to give you an example. I'm not going to try and remember them all. Asuragen carrier screening, owned by Bio-Techne. We have HLA, live organ donor transplant matching with Omixon and GenDx. So those partnerships are in particularly Omixon and GenDx, HLA. They contribute a small amount, but we really are in the foothills. With bioMérieux, we expect revenues next year and the year after. Now, alongside that, there is a real opportunity for revenues in 2024 and particularly 2025 on customers who create their own content and assays. So what they need from us is our regulatory platform, Q-LINE, the diagnostic platform. And that we expect to see some small revenues this year. And there's a real clamor, and there has been since we launched our Q20+ chemistry almost two years ago now.
So that box needs to be frozen in terms of hardware, software, chemistry upgrades. And we're rolling that out on GridION first and PromethION later in the year. So that will result in immediate three-six months revenue profiles because they are able to. They know what they want to put on the platform. They know the features and benefits. And that gives us revenues very quickly in the sort of RUO, LDT, CLIA-waived clinical applications. So no revenues in 2023 and 2024, very little. But there is real momentum. And 2025, 2026 is where we really see that push in those applied customer markets.
Amazing. I guess you just touched upon bioMérieux. Could you hear about what the rationale was for their investment and what that money, from your perspective, is being used for?
So we penned a deal with bioMérieux over a year ago. They had evaluated the GridION. In one of their workflows, it's isolate sequencing. They wanted to take out the PCR step and put in nanopore sequencing. So they were a customer for a couple of years. This is a great example of how these partnerships evolve. So obviously, we think, "Oh, bioMérieux, what are they up to?" Then they approached us and said, "This is how we want to implement." So we signed that partnership, and we made great progress within six months. As well as isolate sequencing, we're looking at multi-drug resistant TB for low- and mid-income countries. It was just a conversation with Alexander Mérieux. He said, "We think this relationship's great.
And the two teams are working really well." They just wanted to sort of show how important they felt we were. So I suggested they might want to make an investment, which we did. I think it's just a reflection of the strength of the partnership and a signal to the markets how well this is really going. We are really excited. Infectious disease is a really difficult space to get into. Having bioMérieux, one of the leading lights in this highly regulated market that is very careful when it changes platforms. It's an exciting partnership. The investment reflects the strength of the two companies and our relationship.
Amazing. We're hearing from your peers that the macro environment is gradually improving. Is this something that you also agree with? And what differences are you seeing in behavior patterns across both academic and the clinical segment?
Gradually improving, interesting. We don't know yet. I think we saw a slowdown in Q4. It seems to be leaking into the start of this year. Hence, our guidance for underlying growth being 20%-30% rather than greater than 30%, which is the sort of bullish approach we've taken since IPO because we're not clear yet whether there is a squeeze on academic funding and how it will impact us. Historically, in 2022, when there was no growth in our peer group, we still managed to grow almost 30%. I think that's around the CapEx versus OpEx model we have. So I think the squeeze is always on CapEx. But if there is we do expect the year to progress. There does seem to be some confidence. But I'm sure Nick can tell you more about interest rates and challenges we face.
I don't know. We floated in October 2021. It's been such a tough market. I dare not try and be optimistic because it's kind of caught us out a few times.
I mean, I think I think of us as more of the micro than the macro in terms of what's going to drive our numbers forward. It's about individual wins rather than the macro that's driving the market that these bigger bellwether companies probably talk to. So it's fantastic if they are saying it's going to get better, but it's not something we're planning on.
Okay. At the last management meeting, the company stated they had reached around 20% of the automation journey. Where are you now, and what more is there left to achieve?
So I think the 20% was an approximate guide, but it was to give a sense of the headroom that we have. For example, the consumable in here, the Flow Cell, has six screws that are manually built because we were very careful to take the prototypes and just replicate that in operations. And that's really simple to automate. So there's a whole range of both design changes and automation. How far are we on that journey? It's mostly been focused on MinION because that's our most stable product. We're 60%-70% of the way to putting all the end-to-end automation in. We are then, from those learnings, starting to implement that on PromethION. But it never gets finished. It's a continuous improvement. But the automation we have put in is showing us the kind of benefits and margin gains we're going to get.
It's just a case of starting to continue to continuously improve PromethION to a certain point. It becomes ready for automation. There's a lot of headroom. In the medium term, we believe we will make huge impact on margin, not just for automation, but some manufacturing design changes that will really help us.
Great. The company expressed the desire to improve working capital in 2024 and beyond. Could you talk me through how you're looking to achieve this and what the key steps are?
Yeah. So we've been building up inventory since the pandemic, but also the supply chain issues that have been around for quite a while. And existing contracts will be rolling off at certain points in the future. But we have around 2.5 years' worth of inventory at a gross level on the balance sheet today. And it won't be something that this year will start to unwind. But when I look further out, particularly as the improvements Gordon's talked to there in terms of improvements in yield, automation, but really, it's about the recycling ability, which is maybe a couple of years out on the PromethION Flow Cell. Once we get there with that, we'll start to kind of start reversing this and chew through that working capital now and the inventory on the balance sheet.
So it means less about we've got a very clean working capital cycle anyway in terms of trade receivables, trade payables. It's a bit more improvement there, but not as much as what we can do with the inventory level that we've got and working through that. So as we grow, we may actually see this be an inflow of cash to us from 2025, 2026, 2027.
Okay. Let's talk about Q-LINE. What's been the early feedback for those that have been trialing it? And is there any risk of the launch being pushed out?
I think mostly, thank God, at last. So we've got a Q-LINE light out there where the assay itself is locked and all the software that drives that. And full Q-LINE is to remove all the sort of fancy things that the sort of life science research tools users want to play around with. In Q-LINE, they just want a black box. And the less things and knobs and dials you can fiddle on it, the better. As I said, there's been a real big interest in the sort of the way to think about it is even this year, there were 2,800 publications. That's a total of 11,000 publications now.
And when you look through some of those, some of the assays that people want to do and the content they want to run, it's going to be I think it's going to be very successful based on the demand. We've only got a few boxes out there in early access, but that's all going well. I mean, it is relatively low risk to just take a lot of features off of a platform. It's just going through the regulatory hardware, software validations once you strip these things out so that that end user can see and have the confidence that things aren't changing anymore. So I think it's going to be important and central to both our clinical applications and the applied industrial, so RNA vaccine manufacturing and other areas of biopharma manufacturing. I'm really excited about it. It's going to be a lot of fun.
We're going to see some amazing applications coming out.
I guess in the last 30 seconds we have, we've spoken to some experts on high duplex, but would love to get your views on what's differentiated with high duplex versus duplex and how it can help you better compete versus your peers.
So right now, the duplex yield is where the second strand immediately follows the first. So you can look at both strands, and you can get phenomenal accuracy, 1 in 1,000 bases. At the moment, that's about 30%-50% success. High Duplex gets us into 80%-90%. And that then allows customers to take nanopore and provide single molecule, sense-anti-sense accuracy, and consensus that's better than anything else out there by a significant amount because of the High Duplex. Now, you don't need that for routine use, but where you've got some really difficult regions of the genome, so when you're assembling a telomere-to-telomere full genome, duplex really comes in and fixes the bits that are hard to do.
On a routine basis, simplex, our single strand going through, will give you the consensus accuracy that will meet all the short read mutations, but then add copy number, structural variation, and methylation. And that differentiation, that all comes in that one run. And having a multi-omic platform from that one run, we believe, will be incredibly important as we kind of push forward the sort of biological insights and that multi-omic excitement there is around looking at lots of different drivers of disease and we're uniquely positioned to do that. We're the only company that's native DNA with all these features and benefits.
Amazing. I think that's all we have time for today. But thank you so much, Gordon and Nick, for joining us.
Thank you.
Thank you very much.