Good afternoon, everyone. Welcome to day three of our Morgan Stanley Global Healthcare Conference. My name is Edmond Tu. I work on the life science tool team here at MS. Before we begin, I want to remind everyone, important disclosures can be found at morganstanley.com/researchdisclosures. And it's my pleasure to be hosting Cytek Biosciences today, and on stage representing the company, I have Wenbin Jiang, CEO, and Patrik Jeanmonod, CFO. Thank you, guys, for coming, and welcome.
Thank you.
Thank you.
I guess to start, Wenbin, can you talk about what you think is Cytek's key accomplishments over the past 12 months? What were some things that you could have done differently, and what are you most excited about going into 2024?
You know, during the last 12 months, a few things we have accomplished. First, on the instrument side, we have really grown our cell sorter business, and as you can see, we had a press release and achieved that 100th cell sorter milestone in Q2. And on the reagent side, we launched a few new kits, including our leukemia panel, as well as the MDSC new kit, new panels to support our user base, the applications for our technology. And then we acquired Luminex assets, including the Amnis imaging flow cytometer as well as the Guava that enable us to own the great technology on the imaging side and the imaging flow cytometry, as well as the entry-level Muse easyCyte technology to support the general user base for the flow cytometry.
Great. And I guess, just looking across the competitive landscape, how has it evolved over the years, and where do you find yourself, if you do, missing out on opportunities to install instruments? And how has the pricing or specs evolved more recently?
I think, from flow cytometry perspective, over time, and you can see the gradual involvement and early days, and based on the conventional technology, we realize, notice, it actually hits the barriers and the bottleneck to support today's immunology and immuno-oncology applications. That's a reason why we developed this full spectrum technology, enable us really to break the barriers of the fluorescence-based flow cytometry can support, and get us to 40 parameters and beyond. Now, by doing this, we are not really increasing the cost. In fact, we have reduced the overall cost structure of the flow cytometry, and while make it a lot easier for our user base and support their needs, we feel very kind of really accomplished.
Through what we have done, we have changed the whole landscape of the flow cytometry industry, and you can see full spectrum technology. Cytek has pioneered it, become the trend and the future of the flow cytometry industry.
Got it. I guess in terms of competitors' capabilities and pricing, are you actually seeing it coming closer to you, or are you still seeing a pretty big delta?
I think here, what we really need to look at is one is the actual price of the flow cytometer. Another part we need to look at is the $ per parameter, and compare. So look at those things. Overall, and I think flow cytometry itself, in the high end, this is where we excel greatly, not really much change on the pricing side. But on the other hand, we have tremendously reduced the $ per parameter cost structures, and really helped to enable our user base, on that aspect.
Got it. And we've been getting some questions on your TAM, and I think you guys have previously stated a $12 billion TAM, and that includes the increased applications addressable by your FSP technology, and the fact that you guys mentioned the power of and. So I was wondering if you can kind of talk to us more about the power of and, how you see your—how you see yourself as complementary to other technologies, and how you're framing this TAM.
Right. And, firstly is, flow cytometry by itself is really an established, business, market and, with great potential. Today, flow cytometer is a basic life science tool in almost every labs out there, supporting from research to translational, to clinical. Now, as earlier I mentioned, and, the conventional technology has hit a limit, and, as, the research continue on and the more and more needs, on the in the Immunology, immuno-oncology side of the studies, and the great demand for a new technology and new tools, and this is where we come from. With what we have, developed, not only, our tool is backward-compatible, supporting all the existing needs and supporting all the existing market, we actually opened up a new application, new opportunities, which conventional technology is not able to support.
That help, actually helps us to expand the market, expand the total TAM. This is where we come from. We feel great, good with regard to how our technology can continue to push the boundary of the scientific studies and for the translational studies, for the clinical trial, and eventually get to the clinical side. We have built this four business pillars from instruments to applications, to bioinformatics, to clinical, and we continue to invest across all of those pillars and to support our expansion of our business. We feel good about the future of Cytek.
Got it. And then, I guess if we were to try to triangulate your market share, I think you guys have previously said that there's a global install base of about 50,000 flow cytometers. The Amnis plus Guava is about 7,000 install base. If we were to factor in your FSP install base, would a mid-teens, high-teens % market share be reasonable?
Yeah, indeed, and overall, Guava plus Amnis together are more than 7,000 install base, but that's the cumulative install base, right? Guava, Amnis has a much longer history than Cytek. Not necessarily every one of those are still in service, but overall, they still have a significant amount out there serving for our customers. The customer base by those install instruments is going to we feel will greatly benefit Cytek for driving not only our current full spectral technology, as well as the Amnis imaging technology.
Also, through this process, it enable us to continue to improve the user interface of our normalization of full spectrum technology to match that provided by the Guava tools to serve for the biologists who are happy with, really appreciate the benefits of those Guava instrument from both cost, user-friendly perspective.
Got it. And then, I guess, switching gears a bit and looking at your end markets. Within your biopharma end market, I think, earlier in Q1, you saw some pressures in the U.S. market, but that kind of recovered in the second quarter, but at the same time, you started seeing some incremental pressures in E.U. Can you kind of just recap what you saw in the first half of 2023 in your biopharma end market? And I think you noted that, you expect the E.U. market to see a recovery in the second half. Has that played out as you expected, or what are some of the trends you're seeing across your three GMs?
Actually, do you want to take it?
Yeah, I can take that. So you're, you're right. So looking at Q2, right, for example, we landed about $50 million total revenue, and it was mostly driven by the U.S. market, followed by APAC and then Europe. While Q1, it was driven by the two regions like Europe and APAC, with followed by the U.S. So being a global organization, the expectation is that all these markets will somehow help each other. When we look at the second half of this year, and where we've come historically, we've seen that typically we have a second half that's stronger than the first half. And this is the result of companies closing on their CapEx budget and so on.
So the expectation is that the European market will be stronger, so will also the expectation of the US market, as well. So overall, I think the expectation for us is that the second half is gonna be stronger than the first half.
Got it. And then, I guess, Patrik, looking at China specifically in APAC, what are your assumptions in terms of, like, another government stimulus for the region? And should it come in this year, would it be a 2023 impact or a 2024 impact?
It's early to say, but I would say it would probably be a 2024 impact, but I'll give maybe a chance to Wenbin to comment on that.
Right, and clearly, Q1, Q2, we did very well for our China market, as you have just mentioned. We benefited from the incentive program, and later last year. And we probably will continue to see some benefit through Q3, because it normally takes some while to close the deal eventually. And as the incentive program goes away, and then it pretty much will go to business as usual. And that kind of change has already been figured into our guidance, and we feel it it's going to basically perform as we have predicted over the next few quarters.
Got it. And then, looking at your academic end market, this end market seemed to have held up pretty well. Can you provide some color on what you're seeing in this end market? And specifically, looking at next year, if there's going to be a low single digit to mid single digit decline in NIH funding, how meaningful of an impact would that be to you guys? Patrik.
Yeah. So currently, the mix between academia versus pharma and biotech is about 50/50. Looking at our numbers this year, academia has actually been fairly strong for us. While we look into next year's funding, I think it's a lot early to really comment about next year, but we continue to see strong demand from academia. And we expect overall, pharma and biotech to remain fairly present on closing on the budget on CapEx budget. So the expectation is that that mix will remain about the same going forward.
Got it. And then switching gears to your products and your instruments. Wenbin, you mentioned you placed your 100 cell sorter in 2Q. Can you speak to the demand and the traction that you're seeing there? And with the cell sorter being one of your bigger ticket items, talk to some of the drivers for its, I guess, resilience in current macro conditions.
Yeah, we all know macroeconomy environment is challenged these days, and with pharma, biotech, and Patrik mentioned academia, we are still doing fine. Now with regard to sorter, I think one attraction for Cytek sorter is it is actually compatible with our cell analyzers. And one of the merit for our user base, when they start to get into the sorting side, they really would like to be able to leverage the investment they have already spent on the analyzer, and they don't want to redevelop something out there. In that case, our cell sorter is 100% compatible with our analyzers. Customers, users can move the panels back and forth.
This is really very great for them from a user perspective, and a reason why we feel and this is really a benefit for customers who come to Cytek instead of some other sorting technology. Pretty much our cell analyzer customer base has already prepared us for our cell sorters.
Got it. And then, in terms of your current cell sorter placements to existing users and new users, what is that mix looking like today? Maybe, Patrik, you can take this. And then, on a higher level, what are some of the barriers to, I guess, getting more new users to come on? Is it just educating them about FSP technology, or what is it?
Yeah, so we don't really break out instrument details by the new user or users, but what I can say is, we are seeing increased demand for the paired instrument, the analyzer and the sorter, which are a great combo. So overall, I think... I mean, obviously, we've sold more analyzers, but we are seeing this increased demand for sorters.
Got it. I guess, how have your current order funnel activity trended in the recent months? Are you seeing negative changes in the velocity or the speed at which orders turn into bills?
Yeah. So our funnel has remained elevated. We have a strong funnel-
Mm-hmm.
Throughout all the regions. At the same time, we've seen a slowdown in turning the funnel numbers into orders. And I think this is probably more the result of a macro environment that's pushing some customers to be more cautious about their cash. Again, we're expecting the second half to provide increased demand just because they have to close on the CapEx budget.
Got it. I guess, turning to your reagents and kits, this is one of the fastest-growing areas for your business, and you guys have put in a lot of development efforts. Where are you guys currently standing in terms of your development efforts, and what are some metrics you can share with us to help us understand or quantify your progress?
So the reagent, obviously, the reagent business is a critical revenue line for us. We're very pleased with the result that we've seen. To your point, it's a very high-growth area. We've added a number of new kits that have come out. The revenue or the total revenue, the percent of total, the reagent revenue as a percent of total revenue, still is like single digit, going up to the mid-single digit, going to high single digit. So very pleased. It's a small business for us, but growing very fast, and we are very pleased with what we've seen, customer traction and demand.
Could that possibly, possibly reach low teens in 2024?
Yeah.
Got it.
Sure. Yeah.
Wenbin, Cytek Cloud is one of your recent efforts that you're trying to push. Can you share some more details on your Cytek Cloud, and what are some of the features that's available on it today, and what are some upcoming features?
Cytek Cloud is a platform, as part of our bioinformatics program, to drive, support, help our user base. And that program and that cloud provide, for example, like a panel construction, panel optimization, reagent purchase, and data analysis, data storage, and also data management. This is what we are trying to build, and some of those functions are already in place. Some are continuing to be optimized and expanded. We feel this is a platform really will help to drive our customers toward a Cytek solution and to leverage our full spectrum instrument reagents and the clinical platform.
Now, actually, since its first launch in November last year, just in less than a year by now, and actually it has done very good, well. And our user base has grown tremendously, and it already, the total number already exceeded the number of instruments we have deployed.
Would it be reasonable to assume that all of your instrument users would ultimately be on Cytek Cloud, as is the most logical?
We don't have a specific number with regard to whether every instrument will have already signed on, but we do know, and our instrument, normally there are several users per instrument. Some actually more tens of those users sometimes. So but absolutely, and our user base is more than double of our number of instrument. So that's a great potential, and it continue to grow rapidly for this one.
Got it. And then, turning to your recent FCI acquisition that you mentioned earlier, one thing, I think you guys reached some important integration milestones recently. If you could, kind of talk about that a little bit, and, what remains to be done here?
From the Luminex integration perspective and a few things from the operation side, we have almost completed all the integration, and there are two platforms. One is the Amnis, 100% completed, and the Guava originally was embedded in the Luminex manufacturing facility. Now we have pretty much very close to the end of the transfer process. There are two products. One is Guava Muse, 100% completed. Guava easyCyt e, right now in the final qualification stage. And then on the commercial side, we have already completed all the cross-training of our sales and the application. We have merged, combined both sales team together and they're now under the same single management system.
Then, the service side, and we are still in the process of cross-training, and we expect all the process integration completed towards the end of the year.
Got it. Then in terms of the new commercial organization, I think you guys have recently made changes and split that into two, with one part being the enhanced sales organization and the other part being the new platform organization. Can you kind of talk about the reasoning and logic behind that?
In Cytek, historically, has been a technology-driven company. We started with full spectral technology, developed our analyzer and sorter, then we built our sales team to push our technology and products to the customer base. Now, with the Luminex acquisition, now we have a more product to offer, and also, and we've combined the resources. Now we find, and it becomes more and more important to hear more from the customer base, to pay, get feedback from customer, to enable us to target the real needs of the customer to develop next generation products, future products in that case. And we feel our current original commercial organization as being pushing our technology to the customer to, and and we need basically a feedback, basically the dual way process.
That's the reason we've decided we feel it's better for us to split our commercial organization into two functions. One, as a sales function and to push our technology, our products. The other one actually to build a dual way feedback loop to engage the customer, hear from customers. And, so with that, we installed and appointed Philippe to manage our sales organization. Philippe has been a very experienced sales executive, and many years ago was a VP of both cytometry sales with big flow cytometry companies, and also built, single-handedly built the global sales force for flow cytometer with one of the flow cytometry companies.
We feel that he is very suitable and very experienced and qualified to help to run our sales organization. In the meantime, we have also appointed a senior executive from our Luminex acquisition to lead our platform organization functions. As you know, Luminex used to be focused on the clinical side. We feel clinical as one of the platforms we are trying to build, and definitely the kind of expertise coming along to lead our platform organization will help to accelerate our clinical activities. So, we feel very good about this structuring and we feel it's going to really help to accelerate the company's growth going forward.
That's a good segue into my next question. On your clinical efforts, you guys have an approved instrument and reagents in both China and EU. Is there any way you can share what percent of your revenue is being driven by clinical applications in China and EU? And, I guess on the China topic, recent anti-corruption initiatives, could that potentially be a headwind for you as some of the hospitals are seeing more screening on spending?
We started the clinical application in China, got our tools cleared for that market, and followed by the European clinical clearance. I think through last year, and we evolved and developed very well for that market with our instruments. In the meantime, in China, we also started to get our reagents cleared to support the clinical application in that market. Although, I think the reasons are actually, you know, we're all well aware of the anti-corruption movement drive in China. We, you know, from Cytek's perspective is, it long term, if actually the problem can truly resolve, actually good for us, for Cytek to grow our business.
Definitely, as a international company and we feel our technology and the functionality actually is really excel. So, without all those other interference, definitely we can accelerate our technology, our growth into the China market.
Got it. And then in the U.S., you have a dual-pump strategy where you're seeking for instrument and reagent approvals, and at the same time looking to do LDT tests. With the FDA recently trying to more strictly regulate LDTs, do you think that could potentially be a headwind for your efforts in the U.S.?
I think from that perspective, and we are actually engaging very closely with the FDA to help our instrument clearance to serve for the clinical market. In the meantime, we have many partnerships, collaborations ongoing with the CLIA labs across the U.S. And I think together with the U.S. FDA clearance activity, as well as the partnership to support the application on our tools, we feel good at long term and to drive our clinical initiatives for the U.S. market, in addition to the international opportunities in China and Europe.
Got it. And then, Patrik, just turning to your guidance real quick. You guys talked about some of the headwinds that you're seeing and some of the considerations, but just help us recap. How should we be thinking about the cadence of revenue in 3Q and 4Q? And, what are some upside, downside drivers to your guidance range for this year?
Yeah. So I mean, we remain behind, we are behind our guidance for the year, which was $205 million-$220 million. So I think we're behind that number. Again, we believe that the second half will be stronger than the first half. Some of the key drivers, obviously, the service revenue will continue to grow, as we've seen it in Q2. We also expect the reagent business to continue to grow, along with cell sorter, and we talked about it, and the analyzers, Northern Lights and the Aurora. So key drivers for us. The expectation here is that the economy remains where it is now and doesn't worsen. But at this point, we believe that we have a good opportunity to close the year in that range.
Got it. And then with the midpoint of your guidance this year pointing to about 30% year-over-year growth, do you think a 30% year-over-year growth in 2024 would be reasonable, or could it be higher or lower than that?
Yeah. So we're not quite ready to talk about the long-term range or guidance. But we have an analyst meeting coming up sometime in November, and we'll provide more, more data at that point.
Got it. And then, in terms of gross margins, with product mix driving down gross margins offset by higher gross margins on the service side, how are you framing gross margins in 2023, and what should we expect in 2024?
Yeah. So, the gross profit margin we had in second quarter were lower than our overall expected gross profit margin. So the second half, we should expect to see some level of improvement coming from, first of all, the Guava product family will be moved out entirely in Q4, and started already in Q3, so we should expect better margin just for that. We should expect also increased margin just because of scale. I think the company's delivered about $50 million in Q2. The expectation is gonna be obviously much higher in the for the third and the fourth quarter.
So overall, I think as we continue to execute on our global strategy to improve gross profit margin, but also OpEx, I think we feel pretty good at where we are at this point.
Got it. And then, I guess turning to your capital deployment strategy with your recent FCI acquisition and your $50 million repurchasing plan that was announced earlier, could you remind us your capital deployment priorities, and what is your current appetite for another deal?
Yeah. So we are actively looking at other opportunities. I think. Yeah, as long as they fall into these criteria that we've defined as a high growth, nice gross profit margin, and accretive to our own business, I think we'll have the appetite. We still have a lot of cash, and also the opportunity to raise money for if need be, through debt or other option. But overall, yes, we will, we'll probably do another. We'll do some level of activity going forward.
Got it. One of the beauties of being the last session of the day is you can go over a little bit, but with the remaining time left, Wenbin, what do you think are some of the most important takeaways from the talks today, and what are some key facts that investors are overlooking that you would like to highlight?
I think overall, as you can see, Cytek is actually probably one of the only companies in the life science tools space that is profitable, right? I think from that perspective, you don't really see that many opportunities here. What we have continued to maintain to drive is what we call the profitable growth, which we feel is really important for anyone and any investors to look into our business, and also important for Cytek to generate value for our shareholders. This is what we'll continue to focus on, and making sure we will maintain profitability when running our operations.
Got it. With that, thank you guys for coming today.