Good afternoon. Dan Brennan, TD Cowen Tools and Diagnostics Analyst. Really pleased to be joined here on the stage with me, Christian Henry, president and CEO of Pacific Biosciences, otherwise PacBio. So Christian, welcome.
Thank you. We appreciate the opportunity.
Completely, yeah. Great. So I think we'd start just kinda higher-level comments, and then we'll dig into the businesses, maybe. Maybe just kick it off, obviously macro, not lost on you, not lost on a lot of the life science kinda peers of yours, large and small, as challenging, particularly for CapEx right now, and, you know, you guys have felt some pressure on the business. Just to kinda kick things off, kinda maybe lay out the strategy right now, you know, what should invite, excuse me, excite investors about the PacBio business case, given some of the, you know, maybe more turbulent times we've seen recently.
Yeah. Well, first of all, you know, you have to look at 2023 was truly a watershed year for the company. We launched the Revio long-read sequencer to incredible fanfare. We, you know, you know, we shipped 173 instruments during the year, which really, really put us on the map. And the reason why I start there is because in order for long-read sequencing to make a significant dent in the sequencing market, we have to develop multiple components. First, we had to develop a sequencer that was capable of the throughput that would enable large science. Then we have to also develop the workflows to get high-quality DNA out of samples, accelerate the onboarding and automate workflows, and develop the backend pipelines. And so we've been doing all that.
In fact, just a few weeks ago, we started shipping our new high-throughput automation kits and this and that. So, what's exciting is that that has created a huge opportunity in new samples coming to market that we haven't seen before. In fact, just over the last 6-9 months, the number of samples that we're seeing associated with large projects that we track have actually doubled. And so now we're talking hundreds of thousands of samples that we are tracking actively to get into projects onto the sequencer, wouldn't have been able to be enabled with Revio. And so as you look into 2024, what's exciting is we're continuing to build the long-read, you know, the long-read story.
And then on top of that, you're gonna see us layering in these large-scale projects that create the databases, that create the informatics capabilities, that really enable the broad market to take advantage of the power of long-reads.
Maybe just sticking with that for a sec, then, just walk through, if you don't mind, I wasn't on the website, just what was the sample prep, volume, throughput, whatever the right metrics are before, and which is missing, and then what is this new HiFi kit? How much faster, how much higher throughput? Like, what's the level of difference we're talking about here?
Well, it's, you know, what we've had historically is we in 2023, we had some automation. Now it's our workflows are fully automated.
Mm-hmm.
What that means is some of the key bottlenecks, such as selecting which fragments of DNA you actually take to put on the sequencer.
Mm-hmm.
Which is an important step that other sequencing companies, you know, that long short-read sequencing companies don't really have because they chop all their DNA up into such small fragments. Those size selection steps, which have been a bottleneck and have had to be done manually, we now have bead-based processes that allow us to basically put it all on a robot and automate it. And what that does is it enables you to really match the workflow with this capability of the Revio. And the Revio, we've said, you know, is capable of roughly 1,300 genomes a year, give or take, depending on what level of coverage. Some customers are using, you know, 15x coverage or less, and these automated workflows can handle that as well. So that's really what we're trying to do, is get a match with the Revio.
In fact, with a robot and a few Revios, you can handle the workflow now.
Yeah. 'Cause Stacey talked about it yesterday, how they had to do a lot of optimization, but they're the Broad, but they could do it. Again, one more question there. So, like, are you saying, are there a certain number of samples, if a customer wanted to run before this automation kit that wasn't, like, super sophisticated, like, it would just be, you know, we just can't get to a certain volume 'cause it's too much hands-on time? Or is there any way to, like, since this the big new projects could be a nice driver, just trying to synthesize, like, what this could really do, for certain customers?
Well, I think it's a combination, right? Customers will still kinda move forward with their manual processes if they decide they wanna get into a project. Part of it is the inertia to get the project started.
Mm-hmm.
And so in order to get a project started, you have to have a scientific idea of what you wanna get done. You have to have access to the samples, and then you have to have confidence that you can accomplish the project. The automation enables, really the vast majority of customers now to be confident that they can run a multi-thousand-sample study with a Revio in a reasonable timeframe. Whereas, you know, maybe early last year and through a lot of last year, that was still being determined.
Got it.
We're still at the very beginning of this journey.
Got it. Maybe can you discuss, like, any key learnings, you know, during the past six months as you progress through product launch and a choppy macro?
Well, I think, you know, I think I'm always learning a lot about this business, and I've been doing it for a very long time, probably more than most. And one of the things in the last 6 months has taught me is that scale-up of a new platform and a new technology has real challenges. And it not only, you know, first, starting with the macro environment, you know, the access to getting the capital to buy Revio systems has been tougher and more challenging, particularly in the last 6 months. And that's in each of the geographies, not just concentrated in one.
But second, helping people understand how to execute on these projects is an area where we did some great early work building relationships with the Broad and Children's Mercy Kansas City and others to really drive this. But it is an ongoing effort because what you're really doing is you're going up against old paradigms with a genome that is more comprehensive, more complete, allows a new level of exploration. And that new level of exploration, quite frankly, is what's so exciting and compelling about the future, but also has this inertia to get over that, hey, there is a reason why you wanna do this versus what you've been doing in the past. And just like anything, people are creatures of habit.
And so the more tools we have in place, the more publications that are out there, the more customers that are raving. For example, at AGBT, just a couple weeks ago, there were several talks on the main stage demonstrating the power of Revio across a broad spectrum from clinical diagnostics in rare disease. And what I mean by that is translational clinical research to agriculture, bacteriology, really a broad spectrum of things. And getting that inertia is really what's gonna help propel driving the next levels of revenue growth and market acceptance.
So as you said, you learned a little bit from some of those challenges, if you will. Like, what are some of the ways it has influenced some of the decisions management's made about, here's our, you know, shifting our priorities a little bit in terms of how we enable that uptake over the next 6 to 12 to 18 months? You know, we talked a little bit about informatics. That was a focus at AGBT. That was probably in place. But any other strategies to further unlock and then kind of enable maybe some of the uptake, whether it be you, you know, you guys have also talked about a reagent rental model. So what, you know, what are some of the things maybe you're doing now?
Well, we're really focused on first of all, we've created a strategy that we think over the next several years will create a very substantial, sustainable company. And that is at the foundation of that is long- and short-read sequencing that is highly differentiated from anything else in the market, and not only having one platform but having multiple platforms that can reach different parts of the market. So that's the foundational piece of it. What we're doing right now is, you know, continuing down that pathway 'cause we feel very comfortable about the product development choices we made and how we're building out the workflows and the informatics overlay that's sitting on top of it. But we're also testing different business model ideas, things that aren't necessarily technology-driven but more reacting and responding to the nature of the capital environment right now.
So the market for capital equipment is tough, as we've just spent a couple minutes talking about. So can we do things, put promotions or things in place that enable those, the midsize core lab, for example, who perhaps can't afford a Revio yet and having their samples sent they're sending their samples to the larger providers, can we enable them with lower-cost capital options where they commit to a certain number of reagents over a period of time and perhaps at a premium, such that we end up in the same place economically, but we enable them sooner? And so we're exploring some of those. We have a couple of promotions out right now that are doing that. We just launched them, so we'll see how effective they are.
These things usually take five or six months to kinda make a determination of how it works. We're also making sure we're focused on continuing to collaborate with our best customers in areas where we think, where we think there needs to be more focus and emphasis. So for example, in epigenetics, you know, doing collaborations to try to show the world why getting, you know, methylation and getting epigenetic calls with every sequencing run is so valuable. And, you know, we've seen early indications of that, of course, in oncology. But we are seeing it in rare disease. We're seeing it in all kinds of areas of research.
And so, finding those collaborative partners that can evaluate epigenetics, that can look at structural variation, we're spending a lot of time, trying to work with those, enable those projects to happen, and then, figure out how we can publish it, get those results published so the rest of the market can see it.
So, China, can you just give us a sense of, you know, your business in China in particular, kinda fourth quarter? It seemed like maybe things had gotten a little worse there in fourth quarter. And kinda what's assumed in 2024? And, you know, kinda what's your visibility like in China? And, yeah, love to get color there.
Yeah. So we operate in a unique position in China in that we have a very, very heavy concentration of service providers. And these are very large service providers. And so they serve the Chinese market. So almost in some respects, they act as our distribution channel. In fact, those service providers, many most of them actually have a bigger sales force than globally or than we have. And so what we've seen happen over the course of 2023 is they scaled up on Revio, and then they sold their services to the Chinese market, to all of the mid and smaller institutions. And as the funding environment got more and more challenging inside of China, the ability for the smaller institutions to buy a Revio has been challenged. And now what's happened is that the service providers have scaled.
So we had one of our best customers bought a very large number of sequencers in the fourth quarter. We didn't ship all of them, but we shipped some of them to them in the fourth quarter into China. And they're gonna also ship some outside of China. And so they're a global provider. And what's happening is they're basically sucking that demand up from the Chinese market. And what we're seeing is that the funding environment is making it difficult for those smaller customers to buy Revio, at least at this moment.
Mm-hmm.
So we're still getting the consumable revenue generally. But what we really wanna do is have the instrument be distributed across a broader swath. And so that's the challenge that's happening in China right now as the funding environment's been tough. Now, there's been some commentary just recently that perhaps there's gonna be an acceleration of some funding into the Chinese market by the government focused in all of the technology areas that you would imagine, you know, AI and EV and life sciences, they explicitly stated. What does that mean to us? We will find out. I don't think anyone knows. But that's kinda what's going on on the ground there. We still expect to grow in 2024 over 2023. But it hasn't been growing as fast as we would have hoped.
Mm-hmm. And maybe just on, like, the instrument outlook. You know, you, you kinda entered the year with around $19 million or so in backlog. You know, our math was it was around 20 instruments in backlog. So just walk through your guidance for flat-to-up instruments. You know, you're coming into the year with a lower backlog than you started entering 2023, right? You almost had.
Yes.
Yeah, ±75 boxes then. So it kinda looks like optically, you need to rely more on orders in the current year. And, you know, you've got other players saying, you know, it's a tough year. We're gonna think, think, think about instruments down, and you guys are flat-to-up.
Well, I think that there's no question that what, what we did in 2022, we launched the Revio in, what, late October, I think, around Halloween. In the next 8 weeks, we got 76 orders, so showing the excitement of the platform sight unseen. You can think of that as a pull forward from 20 you know, 2022 into 2023. So the 2023 you know, when you head into 2024, of course, our backlog is lower. As I said on the I think maybe on the Q2 call and, and probably reiterated on the Q3 call is that, you know, our objective is to actually maintain a reasonably small number of backlog level with respect to instruments because in each instrument, as we've said, generates between $300,000 and $400,000 of consumable pull-through each year.
And so, you know, an instrument that's sitting in backlog doesn't do us really much good. So here we are. We start the year with less backlog than last year, certainly, but more adoption, more people using, more energy, more excitement. You know, we had over 2.3 million social impressions at AGBT, according to my crack team. So, you know, I don't think that I don't know how scientific that truly is. But when they measure that against the competitors in comparison, you know, the next highest company had 373,000. And so there's no question that the excitement around long reads is there. It's up to us to capitalize on the opportunity. And when you think about the context of our guidance, our sales force has a year of selling.
There is a lot of excitement in the market, but it's tempered by the capital market environment right now. We are doing some things to try to manage through that, and we'll see where we go. And so the guidance we gave, you know, kind of in the flattish range, roughly at the midpoint of our guidance, seemed to be a responsible thing to do. We could outperform that. We have the manufacturing capacity and capability to outperform that if we wanted to. We could underperform it if things change. So I don't wanna, you know, say that everything was too conservative or not conservative enough because it doesn't really matter. What matters is our customers are using the systems. They're growing and adopting. Our sales funnels have done nothing but grow.
The number of new projects, as I talked about, the scaled projects is growing and accelerating. And so, you know, all of that bodes for an exciting year and a year of growth where if you look at our guidance, our growth is higher than virtually anyone else in the space. I'm sure there might be someone higher, but at least we're in the upper decile.
Mm-hmm.
I think that's because we've put together a strategy, a platform, a team that can execute and deliver.
Mm-hmm. Maybe just on the funnel. Like, what is how do you guys define the funnel? What is the funnel? I mean, any qualitative color on it?
Yeah. The funnel, I mean, obviously, when you get into a form like this, the funnel's hard to define 'cause I can't send you guys the spreadsheet and say, "Hey, let's take a look at this." But the way we define the funnel is, sales op, we look at it in multiple levels. We look at very near-term opportunities, opportunities that are expected to close in the current quarter and perhaps, and then there's a group of unforecasted upside to the current quarter. Those are instruments that are gonna typically close within one to two quarters of when they get on that list. And then there's the broader funnel, which is generally within the next 12 months. And so we're kind of always looking out about 12 months. There's some opportunities that may extend even further than that.
But we really, you know, we really don't consider those other than to the extent perhaps they're market development activities.
Mm-hmm.
And so we look at the sales funnel in the midterm, kind of in this kind of, you know, 6-12-month time horizon. That level of the funnel keeps growing. Now, the timing of when any particular instrument will get across the goal line and become an order, and then we ship it, and then they start generating consumables, that's gonna vary between quarter to quarter. And, although my belief is that we have the opportunity to continue to grow, you know, even on a quarter-by-quarter instrument basis and I've said that in the past, you know, I do think you have to temper it with the variability in any given quarter. Also, if you look at Q1 specifically, you might have that question.
You know, when you look at Q1 specifically, although we're not giving, reiterating, or saying anything about guidance, you know, the fact of the matter is the vast majority of life sciences companies have a decline from Q4 to Q1. And in fact, if you look at the guidance that everyone's given for Q1, most of the peers are kind of double-digit down, versus Q4. That's just the seasonality of the business. And so yeah.
Yeah. Got it. But that was gonna be maybe a next question. You know, the street's at $50, down 14% quarter-over-quarter, and it was gonna be such a steep decline, reasonable. And I guess you're saying that level of decline is kinda normal seasonality, or?
Well, I'm saying that look, we are still growing our business, and we intend to grow in 2024. Q1 may not be the indicator of the whole year. And if you look at our peers and their guidance and all of that, you kinda put it all together, it's not it, it's not completely out of the norm of what you would expect.
Okay. Maybe just on who's buying the Revios. You know, I think maybe a third of the Sequel customers bought 1 last year. I think it was around that number, if I and, you know, this new to new to long-read or it's new to PacBio. I forget if that also includes Oxford. But that was 40%. You said it could go to 50. Just give us a flavor for how we think about the opportunity set for Revios in 2023 versus looking out.
Well, I think 2023, we certainly aggressively worked on the customers that were large-scale and that had used the Sequel platform in the past, Sequel II, even Sequel I, you know, those platforms in the past because they could get up to speed and start generating data. And data begets more data, right? I - and you need to create a flywheel of information such that it creates excitement and utility for HiFi sequencing. And so 2023 was very, very focused on those bigger customers that could generate revenue for the company and generate data much earlier. 2024 will continue on that theme in the sense that, you know, the big customers are continuing to scale. We saw that in Q4 with a big Chinese customer. We saw that with the Broad in Q4. You know, we see those opportunities happening this year.
But 2024 is also characterized by new to PacBio customers. Maybe I'm maybe not new to long-read sequencing.
Right.
But new to PacBio customers at both scale and not scale. We have a number of projects, you know, of several thousand samples in the funnel that require new infrastructure to get put in place that hasn't been put in place before. And they would be new to long-read sequencing. So when I put my crystal ball on and try to think, "How does 2024 end?" you know, we probably have more than 50% of our orders are coming from new customers. That is so foundational to the success of the company because that's an indication that, you know, long-read sequencing really is taking its place as a material part of this market and that we are broadening out our customer base, which will enable us, as we have future platforms, to, you know, sell into those platforms and keep building the business.
So 50% or maybe even more new customers, large projects, those core labs in the middle enabled by some of the capital programs that we have ongoing, which will minimize, I mean, potentially have an impact on the amount of samples that are getting sent out and being done in-house, which we're trying to get a broader, you know, as you're trying to make this market broader and broader, that's really important too.
And then maybe just on these big sample opportunities, I think you've discussed them on, on the 4Q call, PopSeq. I believe you said that PopSeq contract's not in your guidance. Just what are these that you're tracking, are these I mean, could these just be really large academic medical centers that are doing big projects, or is it actually governments looking at PopSeq? Just a little flavor on maybe what the opportunity set looks like in the funnel for these bigger projects.
Yeah. It's the answer. Short answer is yes and yes.
Mm-hmm.
Some of the projects that we're looking at are national government-driven type projects, outside the United States, inside the United States as well. Some of them are, you know, kind of the major philanthropy or organizations where you see major foundations where you see they're already doing lots of sequencing, and they wanna get large cohorts with long-reads to see if long-read sequencing can help improve the understanding of whatever the disease they're studying. Some of them are outside of even human sequencing, and they're, you know, other species, which is interesting to see. It is pretty broad. It is global in nature.
I think that the ones that are probably nearer term are perhaps extensions of existing programs and also, some projects that are outside the United States, and then some coming from places where I would have never guessed. Like, "Wow. Okay. That's interesting." And I think that's what's so exciting about this market and this opportunity is, you know, we've all been in this next-generation sequencing world for a long time, or at least I have. And it's amazing to me how little we still understand, right? The actionability of the genome today, it's well less than 10%. And the ability for sequencing, perhaps more comprehensive sequencing, more complete and accurate sequencing, more understanding of the regulatory aspects of the sequencing will help expand our ability to understand missing heritability, understand disease, diagnose disease, etc., etc.
That's, that's why you know, quite frankly, that's why I came to PacBio because I think the company has a unique perspective and position with its technology and with its capability that will, really create a significant opportunity to improve our understanding of the genome and create a great business at the same time.
Let me just zoom out for 1 sec. A question I didn't get to in the beginning, but as you said, the guide this year is above, you know, most of the peers, 15%-25% growth. You have the 40%-50% long-term revenue guide through 2026. I think on the 4Q call, you still said it's still absolutely valid. Just kinda walk through the components or any color you can guide give on the confidence or the building blocks of that 40%-50%.
Yeah. It's a good question. And, you know, if you look at the midpoint of the guidance, we're a shade under the $40 million-$50 million for the year, but we're not, but it's not like we're significantly off. If you look at the high end of the guidance, you're kinda right on track. So you know, at this point in time, it sure seems like we have a significant opportunity to achieve at least $500 million of revenue in 2026. What are the components of that? Well, first of all, we have to continue to expand our Revio opportunity and continue to grow there. But we also have several really incredible platforms that are in the product development pipeline. And as those platforms come to market, they are additive.
And so historically, the company had been very serial in how it developed a product. It would develop a product and then develop a replacement, develop a product and then develop its replacement. Our strategy is completely different. Our strategy is to create a portfolio of products at different areas, both in long and short-read sequencing. And Revio's really just the first one. And so, you know, the next up in the opportunity for us is developing a long-read, low-throughput sequencer. And that product will come and will be and I believe it will be additive to our opportunity. Eventually, we'll have an even higher-throughput long-read sequencer, that will be, I believe, additive to the opportunity. And then on the short-read side, you know, we are just scaling up. So in fact, this quarter, we're kind of at our steady-state manufacturing capability.
And so we've spent the last, you know, five or six months really in very early phases of commercialization. And now you're gonna see us really push the envelope even further, you know, in that commercialization phase. And what that means is, you know, for example, we had customers like TGen tweeting out amazing data at AGBT. And the buzz, the virality of that was real. And so we're seeing combination orders still where, you know, people buy a Revio and an Onso side by side. That's an opportunity. We acquired Apton in August, and we're already sequencing on the Apton system at Q40 with billions of reads.
The implication of that is a system that is going to be very, very powerful in high-throughput areas where you're looking for needles in a haystack with accuracy that's unprecedented, that no one's ever seen before. And that's really the objective. And if we can achieve that, you know, I do think we can build a nice niche. So you look at all of these different products. For the most part, I believe they're additive. And as we get more scale, we drive our gross margins up. As we drive our gross margins up, we drive to sustainability. And so that's the strategy. We certainly have a lot of work to do. And there's, and there, and I'm sure things will be different. Things will always turn out differently than you expect.
But right now, you know, I, I see a very great opportunity for us to get there.
Any sense when the mid-throughput product comes to market, what kinda pull-through again? Just, like, zip code-wise, you know, the Revio's $3-$400 now. We're talking something in the $50,000-$100,000. Is there any way to relatively rank kinda what part of the market it would target?
Yeah. You know what? To be honest, I don't know. I really don't know that answer yet. I do know that the instrument will be much lower capital cost, and it'll still be very powerful. So the value proposition will be very strong. But in terms of pull-through, quite frankly, we haven't priced the consumables yet.
Okay.
I do not have an answer for you on that one.
Got it. Maybe last two, gross margin guide for the year, 36%-39%, definitely requires some expansion. What, what you talked about a bunch of discrete drivers on the Q4 call. What's the confidence level? What's the visibility on getting there?
You know, the reality is that I feel very good on the production side that we are going to expand our gross margins this year. Where we ultimately end up, you know, we'll see. But we already have put plans in place and actually are executing on a significant reduction in production cost of the Revio system. In fact, you know, probably as much as 10%, which is a big deal on the cost side of the equation. Some of those gains are actually in March's production. Now, March's production doesn't get necessarily all shipped in March, so it really has an impact on next quarter. But we have a series of things. We've also consolidated manufacturing from San Diego and Baltimore into Menlo Park, which does two things.
It improves the margins on the Onso instrument and that but it also lowers the overhead utilization of the rest of the plant for Revio. So Revio consumables get a boost. Revio instruments get a boost. So you get, you know, you get a lot of gain from all that. So 36, 39 was the guidance we gave. We'll see where we shake out. But I do think that we are in a very positive direction, entering into this year. We'll see how it plays out.
So, final point. Like, you started off the conversation, you know, super excited, thrilled. Doesn't seem there's any change in your long-term confidence. Like, how would you lead people who are sitting here today looking at the PacBio story? Stocks come down a lot. The environment looks still really vibrant longer term. People dive in here. Do we wait? Like, what's the message for investors?
Well, the one thing I have learned is I'm not a stock picker. I'm a business person. And I've spent a lot of time trying to build great businesses. I think that PacBio has. We have built the foundations to create a significant opportunity. And you know, I think that we are well-capitalized. We have a great management team. We have products that are fundamentally differentiated from others. And we have global scale. And so we have. We have all the right pieces. Now we need to continue that by launching more products, continuing to focus on the end-to-end workflows and the informatics, and then, you know, continuing on our journey of making Revio and Onso what it can be. So the combination of those things you know, I like our chances of creating a scaled, sustainable business.
But as an investment, I think you know, I think it's up to people that like yourselves, to evaluate that. And we're just gonna keep executing.
Great. Well, Christian, thank you very much for being here. Thanks to everyone in the audience as well.
Thank you.