A lot of, a lot of presentations in a row. I'm Dave Westenberg, the life science tools and diagnostics analyst here. Susan Kim, the CFO of Pacific Biosciences of California. Just maybe we're gonna start high level here. How should we think about the PacBio's technological differences? 'Cause it's a very interesting technology with some major differentiation.
Yeah. Thank you very much, Dave. Before I get started, I did want to thank Piper Sandler for having us here, at this conference. It's been a great conference.
Good.
As always, the disclaimer, I may be making forward-looking statements, and so, of course, I refer you to our SEC filings, for more information. In terms of our technical differentiation at PacBio, the way that I describe that is really around the accuracy and completeness of the data that you get off our sequencing solutions. So PacBio's, the flagship technology, is our long-read sequencing solutions, and PacBio's success has always stemmed from the belief that you didn't have to sacrifice long reads or accuracy, that you could get both. Our sequencer provides Q30 levels of accuracy for up to 20,000 base pair reads. So very high accuracy and then longer reads.
We sequence at the single molecule or the native DNA, and we deploy a sequencing technology called HiFi sequencing, which enables the polymerase to read the DNA strand multiple times to eliminate random error, which gives us the higher accuracy 'cause it basically takes out that random error, it gives the high accuracy, and gives our customers the completeness of data. And so now our customers can see more than they ever have before. This year also was the year in which we launched our flagship, short-read sequencer, the Onso platform. And in a very similar complementary vein, the short-read platform is higher accuracy compared to existing technologies on the market. It is Q40- level of accuracy, so one error in every 10,000 reads, which is higher than any other published spec out there.
So we're very pleased to have launched our Onso platform as well. This is the year in which we've launched two platforms: the Revio platform, which is our latest generation long-read sequencer, and the Onso platform, which is the short-read sequencer, and we're the only sequencing company to have launched two major platforms in one year. So this year, it has been very exciting for us.
No, I appreciate that. I almost forgot about Onso there. What's a long read, and why do you need them in the marketplace?
So long reads is being able to sequence longer strands of the DNA, and then, of course, with our technology at higher accuracy. The reason that's important is because you can imagine sort of putting together a puzzle. If you have a puzzle that has maybe 20 pieces versus that same puzzle that has 2,000 pieces, the ability to put back that puzzle together with the larger pieces is much easier. So with long-read sequencing, we are sequencing longer strands of the DNA, up to 20,000 base pair long, so kind of over two orders of magnitude longer in terms of that strand. So it's much easier to put back together the various pieces to get the entire genome read. So we can see so much more with long-read sequencing than you can with short-read sequencing.
You can get large structural variation, you can get phasing information, you can see dark parts of the genome that you couldn't see with short-read sequencing. And then also, with our technology, you can get methylation information, which will give you gene expression. So it's very exciting what you can see with long-read sequencing. Last year, the Telomere-to-Telomere Consortium had sequenced for the first time the full genome. Before that, it was a partial genome because of the limitations of short-read sequencing. So we're very excited by the advancements of long-read sequencing and what it can do to propel forward the whole vision of personalized medicine in the future.
Yeah. So let's talk about maybe going from Sequel II to Revio. What were the big improvements of Revio? What did the customers say were the limitations of Sequel II, and how did Revio fix those limitations?
Yeah, thank you for the question. So Revio has been outstanding in terms of the integration of different technological components that have come together to give our customers the amazing platform that Revio is. At the heart of the Revio instrument is a sensor that has a lot of the innovation that came out of the semiconductor industry, that has enabled us to sequence with much more resolution than we could before, such that it reduces the amount of sample you need to start to run your sequencer. We have leveraged that SMRT Cell to have a backside illumination, which again increases the amount of resolution you can get on that sequencer.
But we've also made that SMRT Cell denser, such that you can now read up to 25 million inserts in any one cell, compared to the Sequel II, which was 8 million inserts that you could read at any one point in time. So a 3x-over-3x increase in terms of that density of the SMRT Cell. We've also made the Revio instrument much more flexible than the Sequel II, so you can actually run four cells at the same time, compared to the Sequel II, which was only one cell. Now, there was additional enhancements in innovation that went into the Revio platform, including moving to the GPU versus the CPU previously, and then also having Google DeepConsensus on board, which makes the runtime much more efficient and also makes the compute more efficient.
The end result is the fact that the throughput of the Revio platform is 15x higher than the Sequel II. So the higher throughput improved the economics for our customers, and so now many more labs, many more customers, could access the Revio, because of the higher throughput, could access HiFi sequencing when they couldn't with the Sequel II. So we're very excited by the launch of the Revio platform. It's been the strongest product launch we've ever had in the history of the company. This year, we're having an amazing year because of it. We've had record revenues every quarter. We have exceeded Wall Street expectations and raised guidance every quarter. So certainly off to a great start with the Revio launch.
Yeah. You know, speaking of the good Revio launch, you have had, you know, good news to PacBio. So what percentage of Revio orders are now new to PacBio? Or, and also, if you can cut it another way, new to long reads, and do you see that number improving or flattening in 2024, 2025, and beyond?
Great question. So the orders from new customers this year has been over 40% of orders are coming from new customers. This has far exceeded our internal expectations. Our internal expectation was much lower, and that it would grow over time. So the enthusiasm that we're seeing from more customers, not only from existing customers, but also new customers, has been outstanding, such that we've had a high concentration of orders from new customers this year. I don't anticipate that that's going to change very much, and if anything, the funnel suggests that the orders from new customers could be even higher next year in 2024, and, and maybe it continues to grow from there.
But it just goes to show that the reach of the Revio platform is much broader than we had before, and so it enables us to access more customers, to get new customers on board, as well as continue to upgrade our existing Sequel II customers onto the Revio platform.
Gotcha. Just in terms of instrument cadence, I know Christian gave some commentary in September about sequential improvements. On the call, you did make some commentaries about 2024 capital equipment environment. Should we think about those comments from September and, you know, kind of think about, you know, maybe you saw some new stuff in terms of macro and, you know, maybe that negates that?
So, we did talk on our Q3 call about the fact that certainly this year has been very exciting with respect to the conversations we're having with customers and the order momentum. But we did highlight the fact that the macro environment, having a higher interest rate environment for longer, that does seem to, in some cases, result in higher hurdles for our customer to make a, a purchase, to give us that purchase order. And so the visibility on timing of when the orders come in have become a little bit more challenging. You know, so there were some orders at the end of Q3 that pushed out. Having said that, some of those orders closed in October, and then more have closed in November.
So it still remains to be seen if the macro environment is going to have an impact on our business. But our funnels are certainly very strong. We're very pleased with the enthusiasm that we're seeing from our customers, and over time, we do expect that the Revio install base will grow to be materially larger than the Sequel II install base, and the potential for shipments to continue to grow is very much there. We've had a lot of conversations with customers. For example, we had, for the first time, a customer summit in October, and the amount of excitement from our customers and the feedback that we're getting for what they're seeing from the Revio platform was very contagious and nothing quite like what we had seen before.
You can imagine how powerful it is for a group of customers to sit around a table and then during a break, get an email and say, "Look, another case is solved," and then everybody crowd around that computer to look at that data. So you're hearing more and more examples of that, which is astounding. You're also hearing that with Revio, there's so much more our customers can do with the Revio platform that they couldn't do before, which is giving us a broad diversity of potential places and customers that want to purchase Revio, which is helping our funnels to grow. But also it's giving us opportunity to have access to more larger projects than we've ever had before.
And so certainly projects where we're starting to think about thousands of samples versus hundreds of samples previously, is now starting to be in the mix within our funnel, and so you'll start to hear us talk more about that in the future as well.
Gotcha. Maybe we can talk about margins. You know, 2023 was a little low on margins, but probably expected, just given the number of placements was, you know, ahead of expectations. Do you think you have a good leverage with consumables in 2024 as you start to see the Revios being used at higher throughput rates or higher use rates than you probably would see with Sequel II?
... Yeah, so the gross margins in 2023 were—we always expected it to be slightly lower because it is a launch year for a new platform, and typically you have inefficiencies in that first kind of launch year, and so that lowers your gross margins. The other thing that impacted our gross margins in 2023 was the transition between Sequel II and Revio. So given all of the enthusiasm for Revio, that did mean that the Sequel II demand had dropped a bit faster than what we had expected, and so there were some one-time charges associated with the inventory that we had on our books that we took in the year. So that incrementally lowered our gross margins.
But for the most part, the gross margins were as expected, and then we do expect those gross margins to improve pretty significantly in 2024 and beyond. Now, how are we going to improve gross margins? The way that our gross margins will improve, for one, we've talked a lot about revenue mix, and certainly next year, the consumable revenue volume will be higher, and that will improve our gross margins. But there are also opportunities to improve gross margins on the instrument side as well as the consumable side, and those gross margin improvement initiatives are also already well underway, and you'll start to hear us talk more about it. But for example, on the Revio instrument, the compute cost is incrementally higher than it can be over the long term.
There's just some additional software development work that we have to do, and then we'll be able to lower the compute cost of the Revio instrument and therefore help to improve gross margins in the future. So you'll hear us talk about that in the future. And there are other enhancements that we can do with respect to lowering the cost of material or the bill of material that is in that Revio instrument that will help us to improve gross margins. There's also further optimization we can do on the consumable side with respect to manufacturing, such as continuing to improve yields, which will lower the cost of the consumable and therefore improve gross margins. So not only will the company gross margins improve from revenue mix, but also from driving in, cost reduction on both instruments and consumable manufacturing.
Good. That was a lot of good detail there. So on the Q3 call, you talked about the placements being down in Q4. We normally think about an instrument bolus. Now, I mean, I think across the board, companies are talking about maybe not an instrument bolus this year. How should we think about the Q4 instrument bolus? Did investors exaggerate it maybe too much with PacBio? You know, PacBio is more an academic instrument today, and that, you know, usually is a maybe a Q3 cycle versus a Q4 with, like, commercial companies or... Just any way to think about the Q4 bolus and how it applies to you, or does it?
So, yeah, it's a great question. I would say that the timing of orders has become incrementally, slightly less predictable than it has in the past, just given some of the dynamics that I talked about earlier in this talk, but also in our earnings call. And so therefore, we gave maybe a slightly wider range at our Q3 earnings call with respect to what our revenue will be this year, such that the high end of the range has higher shipments of Revio instruments, and then at the low end, it could be incrementally down relative to Q3. But I would say that the Revio box is not just an academic research box.
40% of our orders are from the academic research space, and then 40% is from kinda core lab service providers, and so we have a good mix across the two, and then, of course, you have kind of children's hospital, governments, and et cetera, to make up kind of the rest of the orders. So we do have a good mix, and I do think that the outlook is very strong. It's certainly what gave us conviction to say that in 2024, our revenues would grow significantly relative to 2023, despite the fact that we weren't ready to kind of completely give guidance. But we are seeing that there is certainly a lot of excitement and enthusiasm, and that certainly hasn't changed. But when it comes to the deployment of funding-
Mm-hmm.
Certainly in academic, but also in terms of how our, the commercial labs are thinking about, their investment that they're making, that timing is a little less predictable.
Good. Thank you for correcting me on that commercial customer. So, when-- can you talk about the Apton acquisition? I'm pretty... I think it's actually pretty exciting 'cause it would put you squarely away in a little bit more of the high throughput area of the market, high-end part of the market. What are the long-range plans for the platform, and how should we think about timelines in that particular product?
Yeah. So the Onso platform is a very good mid-throughput short-read sequencer, and of course, with the chemistry that we have, the SBB chemistry, it gives us the higher accuracy, or rather, it gives our customers that order of magnitude higher accuracy. Now, with the Apton acquisition, what Apton brings is the instrument with the imaging capabilities and the proprietary algorithms and the clustering chemistry-
Mm-hmm.
to enable us to be able to launch a higher throughput, short-read sequencer that leverages the SBB chemistry much sooner and at lower cost than we could otherwise. And so it helps to accelerate the timeline or rather de-risk the timeline and helps us to get that high-throughput sequencer into the market sooner. So we're very excited by that. The mid-throughput market is a good market to introduce SBB chemistry to many labs, but then it's really the high-throughput, short-read sequencing market, where a lot of those labs are spending lots of, lots of dollars on consumables and, of course, running lots of samples. And so it's a very attractive market to be in. And for even within liquid biopsy, it makes a lot of sense for us to very quick, in an efficient fashion, introduce that high-throughput platform for, on behalf of our customers.
Got it. Well, what's the latest update on Onso, and when do you think you'll be ready to share placement data? On a competitive front, how does it stack up with something like Element or NextSeq? And, you know, can you talk about maybe some of the bundling opportunities that, you know, Illumina doesn't have with NextSeq or Element doesn't have on their mid-throughput?
Yeah. So with Onso, for competitive reasons, we have decided not to disclose the shipment or install base numbers. The way that many of our investors and even our existing customers and new customers will see the benefit and the traction we're getting with Onso is with respect to the data and the results that our customers are getting off the Onso platform. So the more that our customers share data, and the more that we are able to share that data and the results that they're getting, you'll be able to see the momentum that the Onso platform is gaining in the market and what it means to have that differentiation with the higher accuracy. So that's how you'll start to see kind of the momentum we have with the Onso platform.
In terms of just comparison with others in the market, the way that I describe that is really that spec of the higher accuracy, that order of magnitude, Q40- levels of accuracy. And actually, in many cases, our customers are achieving well over Q40- levels of accuracy, which is very exciting. So that's how I would compare it to the existing players in the market. And then I think it'll probably be some time before we start to share the actual placement numbers, but I think the results are really what matter-
Got it.
what our customers are getting.
Gotcha. Where do you see yourself in terms of capital deployment opportunities? You bought Apton, you've been a little bit more aggressive in terms of the acquisition, with even Onso, relative to the other sequencing companies. Is this kind of the way we should think about PacBio, as one that is aggressive with platform acquisitions and... or do you think you'll dig into some other capital deployment opportunity?
It is our goal to become a company that is has multiple products and multiple platforms, so we're expanding our product portfolio. Our goal has always been, in terms of the long-term vision, to meet our customer where they are, and so it does mean expanding our product portfolio. Some of which we are doing by developing it in-house, especially when you look at our long-read platform, all the development we've done in-house. And now with short-read, we've done some of that through acquisitions, acquiring the core technologies and integrating it together to provide a compelling solution for our customers. So, there's a lot of execution, and the focus right now is on that operational execution. But kind of like what we've done, we may be opportunistic in terms of looking at what's out there.
If it helps to accelerate that vision, helps to accelerate our roadmap, then we may look to be opportunistic, but it's not the highest priority right now. The highest priority is really to capitalize on the benefit of Revio and Onso and scale those, that instrument install base, of course, and also to get more, consumable revenue from those platforms.
Got it. Do you have a one of the most interesting things going on right now is kind of what in the world has been happening with academic and academic markets. You know, just to, you know, obviously, the big elephant in the sequencing room, Illumina has had a pretty slow, big slowdown in terms of academic markets, but they haven't been the only one in that. I mean, your consumable revenue, if you even look at, like, single cell, across the board, it just seems like academic has just not been in the right place. We've heard several theories in terms of just, you know, supply chains impacting ancillary products, work from home environments. Do you have any theories yourself in terms of what's been happening in the academic markets?
Do you think the end market, academic and genomics, might improve in the next couple of years as we see, you know, supply chains normalize and lab efficiency and whatnot?
Yeah. So actually, I actually think the environment within academic is a bit healthier than kind of what was described there. And certainly, over the next year and couple of years, I think the funding in the academic space is going to continue to grow and continue to be healthy, and there's going to be lots of funding that is going to go into, especially genomics. If you look at, over the past couple of years in terms of the academic funding environment, there is more and more budget dollars that is moving over to long-read sequencing and also to other omic technologies, but the biggest beneficiary has been long-read sequencing, and I think that's going to continue for some time. So the academic funding environment has been healthy.
There's certainly bipartisan support for NIH funding going into kind of our space, and so that has been certainly very positive. I think incrementally, in the short term, some of the deployment of funding has required additional hurdles, kind of what I alluded to earlier. But in terms of the academic space and the amount of dollars and the investments that's going into a technology like long-read sequencing, there's a lot of momentum behind wanting to be able to see more and get that insight that you can with our technology. So that's very promising.
Gotcha. Going into, you know, kind of a little bit more of the cliché question here. What do you think investors are not understanding about PacBio? What's something that you have to explain a lot more that they don't necessarily get right away?
You know, I think with long-read sequencing, it has always been seen as a very expensive technology and not necessarily needed in the lab. But the more that we are able to get more labs access to HiFi sequencing, and the more that they're seeing and the insights they're gaining from dark parts of the genome that they didn't see before, and the deeper understanding of the genome that you can get with long-read sequencing, I think it's surprising folks. It's surprising, labs and scientists, and I think that energy and that momentum is only going to continue to grow.
The thing that I think a lot of labs don't realize is that the value of long-read sequencing with all those insights is so much greater, and also the value that you're getting and the equivalent of what you could get with short-read sequencing is so much more, such that it's not, it's not 2-3x more expensive. It's actually equivalent or maybe even better because of all the insights you're getting with our technology. That's something that is starting to resonate more and more with our customers, and it's about reaching out to more and more customers to see that as well.
Gotcha. Now, you haven't disclosed this, so maybe you can't answer, but, you know, you have Flo Rida at AGBT. You had Macklemore just at the last one, ASHG, and you haven't disclosed it. It's non-public information. But what musical guest are you bringing out for AGBT?
That is a good question, and if you have a recommendation-
Okay.
We'll take recommendations.
Okay. Thank you, everybody.
Thank you.