Thanks everyone for joining us. My name is Mike Ryskin. I'm on the Bank of America US Life Science Tools and Diagnostics team, and we're excited to be joined for our next session by Oxford Nanopore. We're joined by CFO, Nick Keher. Nick, thanks so much for being here.
Thank you very much for inviting us. Pleasure to be here.
Maybe just to kick things off, you know, so our standard question is, you reported first half results-
Mm.
Fairly recently. Strong results, well-received, nice follow-through on the stock price after that. You want to talk us through sort of the key takeaways, the key message from the-
Yeah.
How you saw the quarter, the half play out?
Yeah, absolutely. So we clearly, at the beginning of the year, we guided that we were gonna have this 45-55 kind of step-up in revenue. We guided to a 57% gross margin for the year, and we guided to kind of like a number of things happening during the course of the year in terms of contract wins. By the time we got to the reporting in September, delivered £84.1 million of revenue, so 12.5% underlying growth, which was pretty much the top end of where we guided we would be. The gross margin came in at 58.8%, so quite a good beat against what the guidance was there.
And, you know, in terms of, like, key factors during the first half, we announced that we'd signed this 10,000 genome project with PRECISE, which is, you know, very excited about. We'd said that the NIHR contract that we had last year, 22,500 samples, that started to kind of ramp up quite nicely as well. We'd seen encouraging utilization increases on our larger P24, P48 devices, so up over 20%. And, you know, placement rates were beginning to kind of return to normal. So while it's a very tough market environment out there, we've kind of continued to kind of take share and grow organically.
Actually, as we laid out the results as well, we've now kind of got this new market end split for our customers, so I think that's been well taken by the market. Just giving people a bit more confidence about the trajectory we're going in, market share, the way we're gaining it, and it will lay the breadcrumbs for how we kind of get to that above 30% growth underlying next year and in the second half of this year and for the next three years as well. The other - I mean, there's always a multitude of reasons. I wouldn't even pretend to know why the share price goes up or down, you know, from one moment to the next, but those things all kind of were beneficial in helping.
We've rebased expectations, we've hit the expectations or beaten, and we've outlined, like, our end market in a bit more detail so people understand how we get to break even in 2027, cash flow in 2028. And on top of that, we did talk to the fact that we are looking at we're in the process for how we think about the step up to the main market and potentially FTSE 250 inclusion, which in the U.K., for U.K. investment managers, is kind of a big thing as well. And that, you know, clearly all these things combined with some more buyers than sellers, has actually helped the share price.
Yeah. That's a, that's a great overview. Maybe just start on sort of the second half outlook. You talked about how, you know, you expected this first half, second half split, and you're trending well towards that. But can you go into a little bit more detail on sort of, you know, what are the drivers underpinning that confidence in the second half?
Yeah, absolutely.
A couple of different factors there.
At the beginning of the year, and this is exactly the same message we'll give now, we kind of triangulated how we would kind of see the year play out. We saw at the end of last year that device placements weren't as strong as we'd like them to be in Q3, Q4. And anybody who follows our story knows that the majority of our device placements are done by an OpEx lease, and that means when we place a P24 or P48, actually, we have nine to 12 months visibility in terms of flow cell shipments, and that means we have essentially an order book that essentially we're gonna we know where we're gonna deliver it.
'Cause last year was weak, we knew that the first half of this year was gonna see a lag indicator of that, particularly like in the U.S. Actually, you know, in device placements the first quarter, we knew were a bit weaker, but we could see utilization was increasing, and that's the best organic metric we can have. So the year, we knew if we kind of placed out the same device numbers as we saw last year with a bit of a haircut, at the same utilization rate, just by critical mass, we knew we were gonna see this kind of second half bump. And that's kind of what's seen come through, but the utilization's kind of increased a little bit ahead of that.
We said that if things remained weak and our utilization kind of took a downturn, actually, we've got these big contracts, these bespoke contracts, like we knew PRECISE was in the wings. NIHR, we knew, hadn't ramped up yet, but they could help make up the shortfall. The other metric that we're kind of guiding people to was our sales force, like, efficiency. So, since IPO, we've tripled the size of the commercial infrastructure and doubled the number of heads that have a target on them for inside sales and sales. We've done that at clearly a very difficult time during the end market, but what we know is that in 2022, our average orders per head was up here, and it's trended down because the dilutive effect of adding all these heads.
But we can see, we saw in the first quarter it started to turn, because these people are starting to get tenure of six to nine months, and like anybody in a new job, it kind of takes time for them to bed in, get to know the technology, and then they start to kind of execute. And particularly, you know, in the U.S. again, Q1 2024 to Q2 2024, it was a 30% increase in average orders per head, and that trajectory is kind of in, you know, continuing, not at that kind of same clip, but, you know, it's continuing into the second half. And the way I think about this is, orders per head essentially was, is gonna lead to revenues per head. You know, its conversion rate is very strong, and we're kind of seeing that play through.
And the encouraging thing for the medium-term view is, if we deliver the same revenue per head in 2022, in this year, we don't just deliver this year's guidance number, we deliver next year's guidance number. So it's about the sales force kind of bedding in, becoming more established, and that is, we're starting to see the fruits of that. And without a doubt, we're going to have to. There's always a case of kind of making changes here and there and filling in some gaps.
Yeah.
But actually that's kind of beginning to come whole. At the same time, the encouraging utilization we've seen on the larger devices, so that means our customers are essentially getting more comfortable with the product, and that means they're kind of pulling through more consumables, which are higher margin for us as well. So yeah, some encouragement essentially on that piece, but that's why the second half we've got that. And so we talked about, we delivered £84.1 million revenue for the first half.
Yep.
Because we got nine to 12 months visibility, so we've got a scheduled book of business. Then we've got a run rate, essentially of like the underlying pull-through from existing devices that are out there. And then we have an opportunity funnel, which is quite sizable, but essentially, it's all about converting. And as we think about that, that opportunity funnel is going to be where it's going to position us inside that range of 20%-30% underlying growth for this year. And what we've said is, opportunity funnel gets us to that midpoint, essentially as well.
Okay. And there are also, In the earnings call, you also discussed some of the dynamics within the various, product lines and also between some customers. Anything that stood out there in terms of what's doing a little bit better versus a little bit softer?
Yeah. So clearly, I think everybody's seen, like regionally. Actually, let's start regionally. We actually delivered double-digit underlying growth, ex-currency in China. China's clearly been a headwind for everybody out there, not the same sort of headwind for us because we've just seen greater utilization by customers pulling through. But it's been a headwind against where it could have been, as I think it has for everybody, because of BioSecure, difficulty in placing larger devices into the market. Regionally in the Americas, we've kind of had that lag from low number of devices placed last year. First half of this year, certain months they were now beating Europe, so there's a bit healthy competition dynamic there, which we're hoping kind of plays through and leads to that Americas growth as well.
Then if you're thinking about customer groups, this is why we split it out. So 70% of our business is now comes from the research market, we call it. Those are customers that are funded by government bodies, public bodies, grant funding, things like that. It includes our distributor network. These people are funded for novel science research base, you know, it includes the whole genome sequencing market. That's clearly had a different dynamic in terms of funding and whatnot to our other segments, where applied industrial biopharma, which we're splitting out because we think it'll be a big drive, growth driver on its own and clinical.
So within the research space, we continue to take share, that PRECISE contract showed, and actually, we think we've got quite a lot of building opportunity here, particularly because of our telomere-to-telomere workflow, which is seeing some encouraging signs of adoption, particularly in APAC. That means that we might get a bigger part of the pie there, the whole genome sequencing space. Then within the applied market, plasmids, you know, something as simple as plasmid sequencing, and our technology being really applicable to it, is actually delivering quite substantial growth. So this is a very, you know, well-established market. Don't know, a fifty-year-old technology, but we're actually quicker, cheaper, more accurate. So essentially, those kind of benefits to our product range that we're going there, has meant that we've seen service providers start to adopt it at scale. And so Plasmidsaurus, great name-
Yeah.
You know, they cut a multi-year, multimillion-dollar contract with them in the US, but they're, they've got a place in Canary Wharf now. You know, and they're actually starting to branch out across Europe. They'll go into APAC. They're a great customer, but an exemplification of where a new income... You know, a new body wants to kind of take share from the existing parties out there, and they've created a multimillion-dollar business, not overnight, but very quickly. And they've, they've done it by stealing share and plasmid sequencing. This is great for us. Here's all the kit. You guys go about it, and it's starting to make the other larger, more established service providers now go, "We've got to start doing this as well." It then has made the biopharma customers go, "Well, we actually do a lot of this.
Maybe we should be doing this as well," and so they're starting to evaluate the technology. We're moving from that research evaluation phase to adoption, you know, in more commercial volumes, if we say.
Yeah.
And what they're also doing is, "Well, what else can it do?" The two big other things that people are looking at is sterility testing and mRNA vaccine production, where these kind of two other workflows are gaining a lot of traction, and it's very early days. Only, you know, 9% of our revenue, £7 million in the first half. It's not a big number, right? You know, it's lower small numbers time. You know, it's not huge, but these contracts that we're looking at are multi-million-dollar in size per customer, per facility. And so we're kind of looking at this and going, well, if we can place out 10, 20 GridIONs, the GridQ, it's a locked-down version, per-test basis, and the adoption is kind of coming through. We had a London Calling event, you had Novo Nordisk talking at that.
Got an event in Boston Thursday. Merck, BioNTech, you know, big companies talking at that as well. We're kind of seeing this kind of critical mass where we've had hundreds of customers who are evaluating it in research and now taking it and going actually, now we've got a lockdown version, we can validate this.
Yeah.
We can put a sticker on it that says we don't need to validate it again for another three or six months, and we can use it in our workflow, and, I mean, one of the best things about this is we're not going up head-to-head against the conventional NGS players. We're going up against either fifty-year-old legacy technology or we're going up against, in the case of our mRNA, no sequencing is done there because they take pictures, essentially. We get the modifications because we're taking a live RNA, and that means we're going up against eight orthogonal tests, where people are having to spend millions of dollars to install the equipment.
Yeah.
To get an approximation. Whereas we can say, "Well, we can do that in twenty-four, forty-eight hours." So we work with Lonza on that as well, and, yeah, we're quite excited.
A lot there I want to follow up on. One of the points you made was, you were talking about competition, both in the first half and with some of the big program wins. Can we talk a little bit about the competitive landscape and what's going on in the market? Because, yeah, I mean, as you called out, it's a very tough market environment, but you seem to be handling it better than others. So both from the long-read perspective of PacBio and the, you know, the bigger players in short-read sequencing-
Yeah.
How's the competitive landscape evolving and what's enabled you to gain some share?
Yeah, look, it's evolving, is the right word, and, I'd much rather, I think we all would, be sitting here going, actually, the end market's so buoyant that everybody's-
Yeah
... doing very well because that's what all of us want to see.
Yeah.
It's not nice. We're seeing companies having tough times because we've all been through them. So it's, but it is evolving. In the long read space, the PRECISE contract, 10,000 samples, we think that's just the start. Where in APAC, we've quite a few opportunities that are coming down the pipe and that T2T piece. So now you can use these five flow cells, PromethION flow cells, and do a T2T on our device, means that you don't need quite a few other devices. So there's a price play, economic pull, and as a CFO, I quite like economic pulls by customers-
Yeah
... because they generally get traction. So that's a positive, and that, so that is evolving. Clearly, you know, we're seeing, you know, the competition is intense, but we are managing to take share and maybe weathering better because, like, for our devices in particular, it's a different price point. I mean, times are tough, interest rates are high, there's less investment, there's less CapEx going through. We can place a device out with customers at a much lower price point, and they can just get going on it. I think that's helped us weather a bit of the storm. But interestingly, we are seeing more CapEx purchases now-
Yeah
... particularly from biopharma and applied customers, so it's in the mix. In the, you know, short read space, we don't consider our, you know, long read, short read. We're just a sequencing player there.
Yeah.
Actually, we're a sensing platform, but-
Yeah
... in the sequencing space, there's a lot happening in the short read, and clearly, there's a lot of price pressure going down there. Well, avoiding that because we can offer people a different product. So we can offer people more data, more comprehensive picture of what the genome looks like, and, you know, we can add in that methylation, which I think people have started to realize is actually quite important, particularly from things like oncology. So, and right now, cardiovascular as well. So there are different plays with methylation that are going to start becoming more apparent. So it's definitely an intense market at the moment in terms of competition, but we're not playing into that. Where we are coming up against long read players, it's usually whole genome sequencing.
We're holding our price, we're still winning business, and it's not. Just maintaining our premium product status. We don't really go head-to-head against the other players unless we're talking now applied clinical-
Yeah
... you know, not really biopharma, and in those niches, or maybe even research, I think the fact that our accuracy is now at the right level, you know, you know, the post-chemistry changes and whatnot, we're in a good place. Actually, we're starting to see more adoption by customers who are getting more comfortable with the product.
Yeah, I mean, you mentioned the CapEx difference and the price perspective, but, you know, it can't just be the, you know, any reluctance from customers to spend money because, like you said, some of your instruments are sold that way as well, and that environment should normalize over time. So, to your point on accuracy, is it... Do you feel like there's a threshold that was passed where it sort of enabled some of these other projects that couldn't have been done a couple of years ago?
Yes, absolutely. So I think that's definitely been the case, and this will take time to come through, in terms of we are there. We've got legacy kind of noise to kind of flush out over the next few years, but we are there, and that is just going to be a natural thing that will happen. People will have inbuilt kind of, "Oh, we didn't like the device for these reasons," but actually try us now and see what they think.
Yeah.
That's kind of gaining traction. I think the fact that we've got more workflows, we're increasing the number of things you can do on it as well, is also helping. It's a bit of everything, but I mean, fundamentally, why do customers choose our, you know, device in this space? Because they want the technology. You know, it has to be able to hit certain criteria. We're hitting those criteria now, like accuracy. Fundamentally, the technology is what opens the door with the customer, then you're going to have discussions on price. But fundamentally, they're choosing the product because they want the technology.
Sure. And you touched on NIHR, you touched on PRECISE already, but I wanted to get into that a little bit differently, a little bit further. For programs like that, I mean, you've been involved in some PopSeq programs in the past, and those have come and gone around the world. Can you talk us through the customer decision process? You know, how long does that take? How long have you been sort of negotiating with these? How are the protocols refined over time? Just how does that evolve? Because that's a, you know, it's a major customer, a major program.
It is, although to be fair, I mean, PRECISE, it's a landmark, kind of, we want that to be up in lights, and it's a great customer. We're really excited by it. You know, it's not, you know, it's not like the EGP contract that we have, for instance-
Yeah.
that essentially materially impacted the P&L and, you know, in a good way, and then a bad way.
Yeah.
What we want, we're gonna see here is smaller types of deals, so not the hundred thousand, two hundred thousand. Maybe one day, but, you know, really, people are going: We want to focus. We've got something we really want to look at, and we want to understand it properly in detail now. That's where they're gonna need a different picture, and that's where we step in. So these contracts do take a long time to negotiate. PRECISE was multiple months. I think it's fair to say people were hoping it was gonna be announced second half of last year.
Yep.
It was announced in July, so, yeah, it took a bit more time than everybody would've liked. There's a big evaluation phase. They do go head-to-head against other devices, and they try and figure out what's the best thing they're gonna get out of it, and how is it gonna work. And clearly, there's a price element as well. So, like, all of these things kind of come into it, and it just takes months.
When that gets announced, do you notice a pickup in your conversations, or a change in your conversations with other customers from sort of a recognition perspective, a validation perspective?
Yeah, absolutely. With that, with that project in particular, yes. So, I mean, Gordon was out in Singapore.
Yeah
not that long ago, and there's a lot of interest, but, well, you know, it's interesting, the thing that kind of maybe got more people excited, London Calling and the T2T kind of work, that has essentially kind of started something, and then PRECISE is kind of building on that as well, where we're also doing T2Ts.
Yeah.
So there is growing momentum, and I think for whatever reason, you know, shift of focus in customers geographically. We've definitely seen in APAC and EMEA, a lot of adoption and like, you know, an opportunity funnel that's growing, particularly in that whole genome sequencing space. Not see the same thing in the U.S., in terms of, like, things coming through at the moment. U.S. has been more applied, clinical, biopharma, you know, certainly research as well, but in a different way. Whereas those larger kind of programs, Europe and APAC, have seen quite a bit of interest.
Yeah. Yeah, I think the U.S. is having a lot of other issues right now, so I think we're a little too distracted for that, unfortunately. You mentioned some of the new products. I want to touch on Q-Line, you know, and clinical markets. Just sort of talk about the opportunity there and what's been the reception so far?
Yeah. So we launched Q-Line first off in May. We actually worked really hard to get this out before the end of the first half due to customer pull, and the reason for that is... So Q-Line, what is it? So got our GridION device, start with the MinION. So, my opportunity to pull it out. But that's clearly the MinION.
Yep.
You've got the flow cell within it, and essentially, the Grid is essentially five of those combined into one device that's like this big. Essentially, it's very small, not quite portable, but essentially benchtop. And the Q-Line is essentially the exact same product, except for the software has essentially been locked-down so that now it's out in the market, there will be no revisions for a set period of time. That's important. So if I go all the way back to when I was in the labs and whatnot, what you'd have seen is, for the past several days, you'd have had engineers coming around all the time to revalidate machines, to make sure that essentially they were performing exactly as they should. We all know this. So that the kind of measurements are always the same.
They want the same thing with the sequencers-
Yeah
Because they don't want to have, you know, "Oh, hang on a minute, different readings coming out. We have to revalidate machine." Costs money. They've been calling out for a locked-down version. We've now got that. That has led to sales of Q-Line, and there's a significant opportunity funnel for that product as well, where it's gonna be a growth driver, and we're very excited about it. So, yeah, Grid, Grid Q, the flow cells for RNA, DNA, all of it essentially is getting a lot of traction in that market. We've done the Grid as the first Q-Line version, but we will go into, you know, PromethIONs will also go on it as well. And yeah, that'll lead to another boost down the line.
Yeah, that was gonna be my next question: Is there an opportunity to do the same thing with other platforms? And how much work, and how hard is it to create a locked-down version? Is it on the front end, on the back end, software, so-
Software is the big piece.
Yeah.
But I mean, the device, fundamentally, is, you know, it's the same box, if that makes sense.
Yeah.
We need to be absolutely sure that the flow cell is ready.
Yeah.
And, you know, from a chemistry perspective, manufacturing perspective, we need to be sure that there's no major change that's gonna come through. It's got to be stable, to the point where, you know, actually, we don't need to push the tech any further. And we know that this is gonna be the sort of thing that those markets are gonna adopt, and Grid's there with the MinION flow cell.
Yeah.
Prom's coming right behind it, so it's also ready. We're gonna continue to push the capabilities of both PromethION and MinION in the research market, but we think, you know, that is ready for the Q-Line and locked-down now as well.
Yeah.
It is not insignificant. The amount of work the teams did to make sure that got over the line was huge, and it's. At the beginning of the year, we said the investments that we're putting to R&D, less about maybe the early stage research, there's always a really good chunk of money there anyway for them. Development teams, quality, it's the apps teams, essentially to them to kind of get the money they need to kind of get these things out on time, and as we look forward, those teams are probably going to need more investment again, but it's stepwise fashions.
Is there, I know most, I mean, I know the obvious focus for a lockdown platform would be the clinical markets. Is there, could there be any interest in research more in pharma, just for a sort of more straightforward lockdown version?
Pharma, for sure.
Yeah.
Research customers, potentially, yes, as well. It really-
In some cases, yeah.
In some cases. I mean, it, without a doubt, in some cases.
Yeah. Just because there's such a variety in terms of what the customers are looking for.
Yeah, and I mean, it's worth... Perceptions, you know, we talked about accuracy, that perception's gonna disappear.
Yeah.
because we're there. The perception could also be about variability in flow cell and things like that.
Mm-hmm.
And that's because they're not. We don't put a limit on it.
Yeah.
We could put a limit on it.
Yeah.
And then if we did, every flow cell would perform 100%-
Yeah
... like the expectations all the time.
Yeah.
But actually, research, we take away the constraint-
Yeah
... so that people can try and push it to the limit.
Yeah.
And that's why they get, you get the variability in output.
Yeah.
But like I say, for locked-down versions-
Yeah
... we'll cap it.
Yeah.
And then everyone will know exactly where they are with all of it all the time.
Yeah. Yeah, I mean, I know historically, that was a lot of the debate, or I don't want to say controversy, but yeah, debate on the MinION, on PromethION, you know, on the flow cells is the variability in read length, and flow cell. So again, in a research setting, it's more acceptable, and it's more understood, but there will be applications where-
Absolutely.
That's what we've seen. Yeah.
But it's now at that point where we can lock it and cap it.
Yeah.
And then those questions kind of go away.
Yeah
- for people as well.
Yeah.
But it's been purposefully done that way.
Yep. Any questions from the audience? Throw one in there. Okay. Want to hit on a couple other topics. China, I mean, you mentioned China earlier. You know, I've seen some weakness there, obviously, in terms of the broader market from elsewhere in tools and elsewhere in sequencing. You've reported pretty, pretty solid underlying growth.
Mm-hmm.
Anything in particular stood out that allows you to deliver that?
For China, it's a very different market to the rest of world that we kind of conventionally see, that actually it's the service labs that have actually adopted the technology very quickly, and the IVD market is something that we are looking at over there as well. But and the service labs that have adopted it, their pull-through. So the pull-through by those customers has been very strong, and that's helped offset the fact that we couldn't really place any of the bigger devices into that market because the-
Mm
... BioSecure Act piece. We've now got a combined unit and can get it in, but even with that, you're still seeing delays. Everything needs to be signed off to go to China. That means every single shipment, there is a risk that it can see a delay or a rejection because it's like an application you have to put in. We're seeing that.
Yeah.
So it's not the go-go years, I think that we've kind of seen for the last ten. And we don't believe it's going to be returning anytime soon either, but it's still been a healthy market for us, to your point. Still seeing a lot of interest in the product. We're still trying to enable the right people to kind of get the product as well, to kind of do what they need to do.
Okay. And you know, one of the hot topics in the space has been China stimulus. It's been debated over the last six months, six to nine months. Is that something that you think you'd benefit from, sort of-
A rising tide lifts all boats.
Yeah.
I'd say yeah, we would. So, I mean, even though we've done well, and like, you, you'd have to tell me, relatively speaking, how we've done against peers in the space in China, but I think we've done all right.
Yeah.
And then, like, if growth stimulus comes back, we'd be a beneficiary like everybody else.
Yeah.
Um, yeah.
But no, no indications of anything yet, still, in terms of orders accelerating from it, or...?
Let's wait and see.
Okay.
But it's not. We're not factoring it in.
Yeah. Okay. All right. I want to touch on margins a little bit. You know, you talked about the first half, second half, margin ramp, but then beyond that, your long-term gross margin target, sort of what's underpinning that progression?
Yeah, absolutely. So we delivered. We said we'd do 57% for the year, and we have not changed that guidance number. We did 58.8% for the first half. We did say in March that we would see a stronger first half than second half. I think it's fair to say we did a bit better than we thought we were gonna do. We had a 120 pip headwind from currency, so ex-currency, we're at 60%, which is not bad.
Yeah.
Our medium-term target is 62.
Yeah.
Above 62. So I think we've kind of demonstrated to the market that this is possible, you know, a few years away. What's been driving that margin increase? Two things. Devices. We've done very well at getting returned devices and recycling them. And what does that mean? So the sequencer, essentially, we can, depending on the type of device, we can recover quite a lot, the bits that go inside it and put it into inventory and just use them again. For the GPU, just so then that. The GPU itself, we can also recycle that, and so when we place our P24, we get the GPU back. We can put it into a new device and send it out. So that's a great part of the business model.
The other piece that's essentially helped the margin is even in the MinION with the decreased volume that we've seen through it because of the COVID headwind in particular, the flow cell margins stayed the same, and that's because we can recycle the most expensive part of the flow cell. So we can clean the chip, essentially.
Mm-hmm.
And we are doing, and then we're putting it into a new flow cell and selling that. And we can go around the loop quite a few times on this. So that's helped maintain the margin on the MinION in spite of lower volume.
Mm-hmm.
Which is a good thing. But for PromethION, so the chip is essentially the same product, just a different design, same fundamentals. We've seen yield improvements, and that's driving, that drove a double-digit increase in gross margin. So improving yields, essentially, is driving that, a double-digit increase in PromethION flow cell gross margin. When we actually start to recycle, we'll see another double-digit increase as well, and we're hoping to be able to recycle to, you know, year two. That'll be one of the things that drive us to that above 62% gross margin overall for the group. The other driver, so let's, I mean, let's be balanced and talk about the negatives. More whole genome sequencing kind of contracts, these larger pop-
Yeah.
these kind of programs, they're a drag-
Yeah
... on the margin, but they're very important strategically, and we're gonna continue to kind of grow into that market. We know they're, you know, gonna help. They're gonna help, they're gonna bring down the margin. We know that we've got a mix impact because more PromethION sales relative to MinION, but MinION's a higher margin. There's a mix impact there as well. All these things are just kind of, you know, part of doing business. We're just gonna see it as we grow. However, growth into biopharma and applied and clinical, we're gonna, we sell on a per-test basis, particularly for the Q-Line, and the margins are healthier. Maybe lower volume, maybe-
Yeah
... but higher margin, so that'll help. PromethION fundamentals improving, that'll help, and the other piece is just scale. So scale helps yields, but it also helps leverage the infrastructure we've got there. So when we sell a device, we allocate to the cost of goods the human element of setting up the device, so customers getting the logistics, so customer solutions, field application, technical support, that infrastructure's set. You know, we'll have to add in pockets, but not majorly.
Yeah.
Double the revenue, much better drop-through.
Yeah.
So we've got a few kind of things that are helping us get there, and we think we've been cautious with the 62% gross margin by 2027. Hopefully, the fact that we delivered 60% underlying in the first half shows that we've got a bit of-
Yeah
... kind of keeping to that.
I mean, not to, not to ask you to raise the number, but just sort of hypothetically, what do you see as, as sort of longer-term steady state or, or I don't know, say, ceiling margins? I mean-
Mm-hmm.
... industry, you know, 70% from Illumina was more or less their number. I mean, obviously, the businesses are very different from an instrument and a portfolio perspective, but that's sort of, you know, the one comp we have out there.
Yeah.
Is there a roadmap to something like that in the longer term?
Depends on mix, so it really depends on mix, and I don't have that crystal ball.
Yeah.
Yes, that could absolutely be possible if 99.9% of our business was that applied biopharma.
Yeah.
Maybe not even ninety-nine, you know. If a substantial weighting was towards these customer profiles, then, yes, that is entirely possible because the gross margin, the consumables will be good enough to get us there.
Mm-hmm.
The mix of device relative to consumable anyway is gonna be a swing factor on it. There's too many variables, but yeah, if all the variables worked out in our... the way we want it to, then, yeah.
Yeah.
70% is entirely possible, but I wouldn't wanna-
No
... commit to that.
Yeah.
Because I can't control mix, and we're not gonna say no to business.
Yeah, just hypotheticals. Other parts of the P&L, R&D, SG&A, you know, just sort of OpEx in general.
Mm-hmm.
You know, we talked a lot about a lot of different investments you're making, both on the sales force and on the R&D front. How should we think about that, in the coming years?
Yeah. So R&D, for anybody who did catch the results as well, at a total level, we've seen double-digit increase in our cost base versus the same the prior year period, so first half of 2023. However, sequentially, against the second half, it was actually only up 2%, and that's because we have heard the market. We've listened to our investors, and we have, you know, given, we've made this substantial investment over the last two, three years, post-IPO. We've taken the feedback, we've taken the pill, and we've, you know, really slowed that headcount increase, and we're very targeted on where the investments needs to go whilst we're going through this phase of execution.
Mm-hmm.
And the execution will come through on the revenue line, increasing with, you know, a faster clip now than the cost base, and that's delivered 12.5% underlying growth on only 2% increase in SG&A. Oh, sorry, total cost base sequentially, so quite happy about that. So the next kind of step for it is, well, in R&D, the split of investment is gonna be much more towards development than research. We're not gonna stop doing research. We need to innovate because otherwise-
Mm-hmm
... you know, you're dead. There's a great paper out in Nature about proteomics that I hope everybody's kind of picked up on as well, and our technology being used there, and that's, you know, got huge potential going forward. But for development, we need to continue to invest to make our products more suitable for those kind of emerging markets that have just become very visible to us.
Mm-hmm.
So that'll be a big part of it, as you know, as a good financial analyst, that also means that a lot of that is kind of capitalized, so that-
Yeah.
won't quite hit the P&L the same way. In SG&A, it's about sales and marketing enterprise, and as I said, the revenue per head, the average orders per head, isn't even back to where it was in 2022. So we've listened, you know, we'll hold that cost base until we kind of start to see the metrics go into the area where now we need to invest again. So very simple on the sales one, very, very top level.
Yeah.
But we have an opportunity funnel, like number. We have an orders per head, and you have a revenue per head, and the opportunity funnel is kind of ramping because I expect it to, because we've doubled the, you know, the number of people out there-
Yeah
Trying to get orders. So they're going to say that they've got all these opportunities coming. When that starts to plateau, that's when I know that actually probably need to start adding in more heads.
Yeah.
We're not seeing that yet.
Just thinking forward, when you do see that, will it be more gradual in terms of future sales force expansions, or do you kind of see the same sort of like step function?
We've got a big presence in the U.S.-
Yeah
APAC and EMEA. Really, they're like... We're talking, let's go direct in South Korea. Let's go direct in-
Very specific.
Yeah, exactly.
Much smaller markets.
Yeah. Yes.
Yeah.
All additive, and all worth doing, but they're not the kind of same thing as, right, we need to go put 100 people in the U.S. to cover every territory.
Yeah. Okay. We're almost out of time. Any last questions from the audience? If not, we'll close with our standard question, which is, you only have one minute to answer this: What is most underappreciated or misunderstood about Oxford Nanopore?
Good question. What's most misunderstood? I think at the moment, the most misunderstood or underappreciated piece is that people think we're another sequencing device, and we're not. We're a sensing platform, and we keep on saying it, but actually we're gonna start seeing it in the numbers. We're growing underlying when others aren't. We're going into white space where our conventional competitors can't play because the tech won't work there. And I think that's gonna start making people realize that actually there's more to this than DNA.
Okay.
So, and yeah.
Okay.
Yeah.
Yeah. That's a good answer. All right. With that, thank you very much. Thanks for joining us. Nick, thanks for being here.
Oh, thank you.
Appreciate it.