Hey, everyone, good afternoon. I'm Tejas Savant, I cover the life sciences here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. So it's my pleasure this afternoon to host Pacific Biosciences. Speaking on behalf of the company, we have Christian Henry, CEO. Thanks, Christian, for joining us. Much appreciated. So, maybe, just to kick things off, not unlike, you know, many of the life science companies out there, it's been a challenging year for instrument vendors like PacBio. Despite the ongoing challenges, what are the key accomplishments through the year that you're most proud of, and what are you looking forward to as you head to next year?
Yeah. It has been a challenging year, and first of all, thank you to Morgan Stanley and Tejas, thank you for all the support over the years and for this opportunity. It certainly has been a challenging year for the company, and when I start to think about the things that have gone well, in particular, you know, our team has done a great job of sticking together through a challenging time. We've made progress in a couple of fundamental areas. First of all, our gross margin is starting to move in the right direction. We had a 400 basis point improvement last quarter. The reason why the margins are fundamentally improving is because we've been able to, through a partnership between R&D and operations, drive the production costs of Revio significantly down.
Revio is our flagship sequencing instrument, and we've been able to take almost 20% of the cost out of the instrument.
Mm-hmm.
That doesn't happen very often in life sciences, where you're able to take the production costs out, so I'm certainly proud of that. I'm also proud of the progress we're making in R&D on new platforms. When I joined the company, I put a bold strategy forth to develop a multi-product portfolio of sequencers and instruments that would reach all aspects of the market. And the team, you know, we launched Revio. We started shipping that in early twenty twenty-three. Now, we're working on a benchtop sequencer, and we're making incredible progress there. We're also making progress on a very high throughput short-read sequencer.
Mm-hmm.
And finally, we're also making fantastic progress on a super high throughput long-read sequencer. And so I'm really proud of the R&D team for not only the breakthroughs, but also keeping us largely on schedule.
Mm-hmm
... even with a significant reduction in force, and I guess that would be the last thing, is when we weren't achieving the results that we had hoped to achieve this year, we were very aggressive and early in making very significant cuts to preserve our capital to... But yet, we're still making all of the progress in R&D. And so we said, you know, our goal was to achieve at least $75 million in run rate savings, and the reality is we've achieved significantly more than that. And it happened in a reasonably quick time frame, very definitively. So I'm proud of the management team-
Mm-hmm
... for making some tough decisions. So in spite of the revenue performance this year, we're making a lot of really great progress, and I'm very optimistic about the future.
Got it. So let's start with Revio placements. I mean, you know, the elongated instrument purchasing cycles continue to present a challenge for placements. What proportion of the shortfall would you attribute to budget cuts versus more approvals being required before an order can be placed, versus, you know, just a significant amount of long-read capacity being added, and which is taking a little bit of time to get absorbed?
Yeah. I think I mean, there are certainly components of all three of those. I think, the funding environment for capital equipment has been challenging because of, for different reasons in different parts of the world.
Mm-hmm.
In China, the general economy has been challenged, so the investments in R&D have been curtailed somewhat. High interest rates in the United States have certainly created more anxiety in purchasing agents. And you know, Europe, the combination of the situation in Ukraine, higher energy prices, as well as interest rates, have all put purchasers of large pieces of capital equipment on notice, which have driven both principally longer approval cycles, more "We can just do this next quarter. Do we really have to do this, this quarter? Can we wait?
Yeah.
We've heard that quite a bit. With respect to federal funding going away, like, not coming back, there have been a few limited situations where we've seen that with some high-profile programs, and so you know, we've seen that a little bit, but I would say it's really that middle category of people just saying: "Hey, we can pause-
Mm-hmm
... and we will get started next quarter. We've seen that with our results. We said at the end of the Q1 , 13 instruments slipped, you know, at the end of the Q1 .
Right.
Many of those have already been, you know, some of them got purchased in the Q2 , the Q3 is still underway. So it's not as if those deals have gone away permanently.
Mm-hmm
... but they have certainly been delayed. And if you look at our sales funnel, one of the questions I get a lot is, you know: How much of it is that there's just too much capacity in the market-
Right, right.
versus the funding, you know, kind of these funding delays we talked about. And when you look at our sales funnels, the demand has never been more, has been higher. The funnels are continuing to grow, and there's more conversations, more publications, more talking about the long-read technology now that the economics have improved.
Mm-hmm.
Our capabilities across the portfolio from sample extraction through analysis continue to fundamentally get better. And so those are indications to me that it's not that the overcapacity, although maybe in certain situations with expansions, accelerating expansions-
Mm-hmm. Mm-hmm
... have been impacted, but not the fundamental drivers of that demand. So that's the fire alarm, but there you go. Okay, there we go.
Okay, there we go. So you know, you know, you noted that based on the sales funnel, placements are expected to improve, and July was the best first month of any quarter so far in twenty-four. Was that largely a function of those European orders that were awaiting approval coming through, or did underlying trends actually start to get a little bit better? And on that note, what are you seeing in the market in August in terms of customer behavior?
Hmm. So what we're seeing is that, you know, July was good. We had a strong July. We said that on our earnings call. It was a combination of both, improving utilization of consumables, as well as some instruments getting across the goal line, as you suggested. When you look at these life science capital equipment businesses, generally, month three of the quarter is really where the majority of the capital activity comes in. So it's, you know, difficult to predict and game out the whole quarter from one month of results.
Mm-hmm.
But we did see a very nice July, and actually August was. The utilization has been improving, and we've been seeing tick-ups in consumable utilization in many parts of the world, and so that's actually quite encouraging and gives you a sense that, okay, people are starting to use their instruments. The sales funnels, you know, the majority of the sales occur in the third month of the quarter, so-
Mm-hmm
... you know, it's impossible to know in the first week of September how the quarter is going to end.
Right.
But we certainly are seeing the sales funnels and the activity be at paces that we, you know, that we kind of expected to see, so.
Got it. You've put in a significant amount of effort to just reduce the upfront capital requirement for Revio, including the leasing and the rental programs with Mitsubishi, as well as new, I think you've got a $99,000 trade-in promotion for Onso as well. Have those efforts proved helpful in closing deals and shortening the sales cycle?
You know, I think it's still a bit early to tell in total, but they certainly have done what they- what we've intended to do. And when you put in these promotional programs, the objective of the program is to drive the next conversation-
Mm-hmm
... you know, with the customer, to push them to the next spot in the sales cycle. Sometimes it's through, "Hey, okay, we're gonna take this, you know, we're gonna take this leasing program or this rental program or this trade-in," as you've talked about.
Mm-hmm.
Other times, it's to drive the conversation and then, through the discovery of what the customer really is looking for, you say, "Okay, well, we'll give you..." You know, they say, "Well, I really don't want a lease, but if you give me another $10,000 discount, then, you know, then we will move.
Mm-hmm.
And so the promotions have been extremely effective at building, you know, driving those next conversations, and they're a great option for our customers to take advantage of. And for PacBio, what's amazing about it is the fact that in virtually all these promotions, what happens is that our leasing partner actually pays PacBio for the full price of the system. And so we effectively agree on the sale, we get the cash flow, we don't take any financial risk, and our revenue gets recognized, you know, in that quarter. One thing I will say with respect to Onso specifically, the $99K promotion has created, you know, a very, very significant increase in the sales funnel, which we are anticipating will drive a significant increase in placements over the back half of the year.
Got it. That's great to hear. Going back to, you know, the Revio, utilization, if you will. You've helped us think through, the three categories, right? The high, mid, and low, utilization, buckets of your customer base. Where do you think those three categories settle out in steady state? I think you called out, more mid-utilization customers coming through in the Q2 , but then you've also got migration of people, you know, sort of moving to higher throughput sort of, categories.
Yeah, you know, it's always a difficult thing to predict, but when you think about PacBio's business, what's exciting about what we're doing is that we are reaching a whole new set of customers.
Mm-hmm.
Roughly, almost half of our orders now are coming from brand-new customers that haven't done long-read sequencing, or maybe they've outsourced some samples, or maybe they're coming from another long-read provider. But the reality is, the vast majority are coming from short-read sequencing, and there is a greater startup period, and so that first bucket of utilization, I think, will be very significant, probably for the foreseeable future, because we're still so young in our market penetration, that we'll see a lot of that. We'll also see, on the high end, we have several really high throughput customers, and I do think you're going to see from the mid-utilization, you know, a couple of customers, maybe three or four customers every six months, kind of moving into that high definition-
Mm-hmm
... bucket, and of course, this is dependent on projects and funding cycles-
Yeah
And lots of different things. But I do see the proportion of higher throughput customers, those with multiple Revios or expanded fleets, you know, moving into that high utilization. But at the end of the day, when things finally settle out.
Mm-hmm
... you would expect it to look a bit, a bit like a bell curve, probably with the low end being a little bit higher than normal than the high end.
Mm-hmm.
You know, a typical bell curve, which that middle utilization bucket will be predominant. One other thing that's happening, Tejas, that's interesting, is we are seeing a lot more excitement about about using long-read sequencing in clinical applications.
Mm-hmm.
You know, Q2 , for example, almost a third of our instruments were sold to kind of translational/clinical type accounts. We talked about Quest buying some systems last quarter.
Mm-hmm.
Children's Mercy Kansas City expanded their Revio fleet. And remember, they were the first to have a first-line translational test that they do, using Revio for all the kids-
Mm-hmm
... with rare and undiagnosed disease. And so that's actually very exciting to see that research, you know, happening, really helping these families. But I think, the reason why I bring that up in the context of utilization is, these more clinically focused customers have much more durable revenue streams, much more consistent utilization, and therefore, are probably going to move much closer to the high end of utilization much sooner.
Mm-hmm.
And we're seeing that in, you know, in rare disease, of course, also in carrier, in people preparing for carrier testing assays, basically using our targeted sequencing capability that we launched. We launched a new product called PureTarget back in Q1, and that panel is really a targeted sequencing, long-read targeted sequencing panel, that targets all of the genes that short-read sequencing has a really hard time sequencing. And so as a result, these customers are saying, "Wow, I can take this panel, I can customize it a little bit, and now I can run, you know, thousands of samples through my Revio every single day, and build businesses around it.
Hmm.
That's a really, really important milestone for the company going forward.
Got it. You know, you've talked about that low utilization bucket, you know, that has ticked down in terms of the pull-through from, I think it was marginal, $120K-$110K, probably just quarter-over-quarter variation. But with new PacBio customers now ticking higher and representing almost sort of half the orders, what does that mean for that $300K-$400K pull-through sort of framework that you had talked about in the past?
Yeah, I think it means that timing is everything, right? And as we go on this journey to kind of penetrate the market more deeply with new customers-
Mm-hmm
... using Revio, we will have fluctuations in the pull-through. I think, right now, we're thinking that pull-through for twenty twenty-four will be roughly around $260 or somewhere in that sort of range.
Mm-hmm. Mm-hmm, mm-hmm.
Which is below, obviously, the 300 K-
Mm-hmm
... $300K-$400K. I don't think the $300K-$400K range is out of the question, but I do think, given this funding environment and given the new customers, we're more likely on the lower end of that than the higher end. Whether that settles out at $275K, $325K, $350K, $300K, you know, I do think that there's a lot of variability-
Mm-hmm
... and we're still early enough in the product cycle where we don't know definitively, where I can say, "Okay, well, look-
Got it
... everyone's model should be 308, and-
Got it
... that's where we settle out.
Fair enough. You've got the new sample, the consumable kit coming out that has the lower sample input requirement position.
Mm-hmm.
Is that... I mean, can we expect it at the ASHG? And as you think about the market expansion that that unlocks for you, can you just share some color on that?
Sure. Well, today I'm not announcing the timing of any product launches.
But at ASHG, you will.
Well, I didn't say that. I just obviously we want to talk about new products in front of our customers first, I think, is what we want to do. But what we're doing, I think, Tejas, is what we're really focused on, is we're figuring out how do we continue to add value to the Revio system through chemistry, through software, through other changes. And part of that journey is driving sample throughput, driving sample input requirements down. But you know, when I first started at the company, we were looking at 15 micrograms of DNA required for one human sample.
Then we moved it down to five micrograms, and now down to one to two micrograms, and we are moving very quickly towards a paradigm of, you know, nanogram level, not one nanogram, but, you know-
Mm-hmm
... in nanogram scale. Why does that matter? That matters because it enables access to samples, millions upon millions of samples, that we perhaps couldn't get onto the long-read sequencer, and puts us on par, you know, with the short-read sequencers from that perspective. One specific area would be newborn screening assays, for example. You know, the ability to take a heel prick and get enough high-quality DNA off of that heel prick, and still have some DNA left over for other experiments, you know, is completely enabling when you're looking at nanogram-level quantities. Which means that we could get into markets that we, you know, would have a really hard time getting into otherwise.
And so at the end of the day, we're focused very much on improving the performance of the Revio platform from end to end.
Mm-hmm.
This, the lowering the input requirements is really fundamental because it enables, you know, it enables us to basically reach the entirety of the market, whereas in the past, you know, we've been on a journey to get there, and we're really there at this point.
Got it. I want to ask you on Illumina's 5-base genome, how does that affect your value proposition for native long reads? Now, you know, there's inherent limitations to a short-read genome, and I'm not sure this sort of gets around that, but Illumina does intend to offer it at no additional cost. Walk us through how you think about the use cases, and then to the extent that might become a factor for your customers. On a related note, what are your plans to launch 6mC?
Yeah. So we'll start with kind of the perspective that our competitors are trying to launch, you know, five base genomes. The first thing, let's just all acknowledge that it's a recognition that looking at epigenetics is really important, and you know, when you look at single-molecule sequencing, long-read sequencing using PacBio, we have been sequencing, you know, methyl C, and for quite a long time now, and it's native with every single run, and it's free with every single run. That is a significant advantage. The other advantage that we have is that we can see all parts of the genome, and you know, short-read technologies can't.
So the reality is, even if they have that product, if they can't see the part of the genome that matters, I'm not sure it really matters that much.
Mm.
We have a significant advantage there. The acknowledgement that it's important, I think, is interesting and useful. The reality is that with our single molecule sequencing framework, we can see it natively. We can see it across the entirety of the genome, where others can't. Now, the other thing is that we are not only working on, you know, methylation as we already have it, but then also hydroxymethylation, as well as methyl A, you know-
Mm-hmm
... so it's Methyl A, which isn't super important in human genetics, but in microbial genetics, it's a really big deal.
Mm-hmm.
And so, you know, our technology is fundamentally amenable because of the way we make measurements on the system to look at all three of those.
Mm.
As we continue to improve the Revio system, we will be introducing these further epigenetic markers, which I think will have, you know, just more value for our customers and further application to show why long reads have major fundamental advantages over short reads.
Got it. Quickly on China, you know, talk to us about the breadth of interest in the Revio, beyond those long-term customers you have in the region. Or is that sort of really contingent on you launching your benchtop long-read box? And then, are you starting to see any noise in the market from BGI's push of their nanopore platform?
Yeah, so starting with BGI and working backwards, we really haven't seen any-
Got it
... any pushback on that, or any penetration that-
Okay
... that would have impacted our business. And so, you know, we're watching, I'm sure as everyone is, how they operate and what they do, and whether they can commercialize outside of China or not.
Mm-hmm.
You know, well, that will all, I'm certain, remain to be seen. With respect to Revio inside of China, there is interest for Revio inside of China beyond the core service providers, but certainly, the benchtop system, at its much lower capital cost point, will be accessible to hundreds, if not thousands of different customers-
Mm-hmm
... throughout the country. And, you know, today, we go to market through a distributor network, you know, a channel partner network. But the reality is, most of our revenue comes from a set of core service providers that have their own sales force, and so we get that multiplier effect from them. As we get the benchtop system to market, I believe we'll be able to see a combination of both, where we'll be able to penetrate more deeply into the market directly-
Mm-hmm
... with the benchtop system, and still have the power of Revio. You know, if you go back to the fundamental strategy of the company, the reason why you develop a benchtop system is so that you can make the technology more ubiquitous with the number of people that you see in the market, and over time, as those people get familiarity-
Okay.
The fire alarm safety director, the testing of the fire alarm system has been successful. We apologize for any inconvenience.
That's great. The fire alarm has been tested. So over time, as you place more and more instruments into the market, people get more familiar with the power of HiFi and long-read sequencing, and as they scale up their science, it's a natural sell into Revio. So that's a really important thing, whether it's in China, the United States-
Mm-hmm.
Europe, Asia, other parts of Asia. The other piece that's actually really important is it gives us a way to protect price of the Revio system and those capabilities, and you set the dynamics, the pricing dynamics in such a way that you know, the capital will be more expensive, but the running costs of Revio will be dramatically cheaper. The capital costs of the smaller system will be dramatically cheaper, but the running costs will be dramatically higher.
Mm-hmm.
and, you know, for those level of pull-through, the higher cost per G, so to speak, it won't be. It's not a factor-
Mm.
in enabling the science.
Got it. Fair enough. One quick follow-up on China: Has the July strength in consumables held up? And any updates on what you're hearing from your customers with respect to stimulus funding, and is that starting to bubble up in your funnel conversations?
Yeah, you know, the stimulus, it's a bit ethereal, I think. I think there is stimulus happening. Has it been funded yet? It's difficult to know. We're not really seeing that yet, or at least in the conversations that I've been having with our GM.
Mm-hmm.
So that's one data point. With respect to the consumable pool, actually, the utilization of the Chinese customers has been actually quite strong, and so, you know, that is a market difference than earlier this year.
Got it.
We'll see what does that really mean over the next, you know, six to nine months? It's difficult to know.
Got it.
But it is nice to see that they're using their systems.
Fair enough. Quickly on academic funding, Christian, what are you hearing in terms of the environment into next year? Obviously, Europe is looking at some horizon cuts and spending, the NIH budget here, muted growth at best, and you called out the All of Us situation.
Yeah.
And starting in October, I think, is when the cut goes into effect. So, as we think about, you know, the funding for not just research, but even these big PopSeq projects, what's your perspective?
Interestingly, with respect to core academic funding, you know, I do think the NIH cuts create anxiety, but not fundamental changes to the dynamic of what's actually happening on the ground.
Mm-hmm.
I don't think the prolonging of sales cycles immediately, you know, transitions back to, say, what it was three or four years ago, but I also don't think it gets much worse.
Mm-hmm.
With respect to population sequencing programs, there's still incredible interest globally to do PopSeq, particularly with long reads now, as they become economic across, across the board, from, you know, from the sample prep side through the informatics side and the sequencing. And so, you know, we're heavily involved in the PRECISE program in Singapore, and that sequencing, we won this project in Estonia.
Mm-hmm
which they are, they, you know, that we won that project against both of our core competitors, and so we have got the entirety of that project, and we're pretty excited about that. The sequencing is going fantastic. They will soon have some data to share, which I think will be, you know, useful. So when you start to think about population scale sequencing, NIH funding is important, but there's all kinds of different funding sources that is driving that, and we're in conversations kind of on a global basis. The other thing that's really interesting is that I do think the philanthropic organizations are excited about picking up the load.
Hmm.
Now, sure, they're not, they're not the NIH-
Mm-hmm
... but the ability to do for example, we won the GREGoR Consortium project, and we're seeing the sequencing going on with them, and that's basically funding through philanthropy. We have our long-read sequencing capability, with HiFi, gives us the ability to sequence the areas that haven't really been sequenced very well, so neuro diseases, for example. And there's lots of excitement and funding in autism and ALS and-
Mm-hmm
... you know, Huntington's and DMD, and all these different areas where there are opportunities to do large scale. They may not be PopSeq projects as we typically think, but they could be projects in the ten thousand plus sample range that, you know, that really take advantage of the power of long-read. So I'm actually pretty encouraged that even if the NIH is noisy, which it certainly is, there's no question about that.
Mm-hmm
... that our opportunity really doesn't change.
Got it. You know, you talked earlier, Christian, about a really nice backlog for Onso on the trade-in. You lowered your price per GB as well over there. So two-parter over there, right? So on the one hand, you know, you're clearly seeing that elasticity of demand come through, but what does that mean for the price per insight philosophy, right? That essentially, ultimately, you know, lowering the cost and the price per GB is hard to get away from-
Hmm
... in customer negotiations and. On the other end of the spectrum, you know, Illumina is now trying to make a push to, towards workflow-based pricing as well, and just given how large they are in the sequencing market, does that, you know, essentially create an umbrella benefit for everyone else as well, in terms of moving towards price per insight over the medium term?
Yeah, I think there certainly is a move where it can't be just a race to the bottom. It has to be a value. There has to be value created. And for PacBio to be successful in short-read sequencing, we have to demonstrate that our technology provides insights or values that others don't. Recently, there was a paper published that demonstrated that PacBio short-read sequencing was ten times more accurate than Illumina sequencing. Now, you know, people can debate how much does accuracy matter or not matter, but it certainly helps with respect to driving the cost of sequencing down.
But probably more importantly, in specific assays where you're looking for a needle in a haystack, and you need to know that that base is right or that variant is right, you know, the change in accuracy matters a lot. And our whole thesis is to build platforms that enable you to push into that part of the market.
Mm-hmm.
And the reason why we think that's so important is because, you know, in our view, the MRD market, the liquid biopsy market, over the next decade, is probably gonna be the fastest-growing and most valuable part of the sequencing landscape. And by having a platform that plays right into, that has strengths that play right into that market, give us an opportunity to create a big business. The last thing I'll say about this topic really is starting to think about: how do you create coordinated insights across different multi-omic data sets, across, you know, leveraging the power of AI or other tools to go way beyond just, "I can sequence this"? I think the future and the way you're going to create competitive advantages is by developing capabilities to be able to look at multiple types of data.
Mm-hmm
...and have software capabilities to help interpret that data. That allows you to do a couple things. It allows you to think about your business models differently. It gives you specific competitive advantages. It also allows you to sell at multiple levels.
Mm-hmm.
You can sell at the scientist level or, you know, or the technician level, so to speak, at where the sample's touching your system, but you can also sell at the decision support level, and that level, that ability allows you to, perhaps, you know, show that even though you're a lot smaller than, say, your competition, you can do something that they can't-
Mm-hmm
... and perhaps drive a revenue opportunity that way. So, you know, the Onso platform itself is an important platform for us to demonstrate the power of the data type.
Mm-hmm.
Then, as you know, we made that acquisition of Apton-
Yep
to develop a very high throughput system, and that R&D program is going exceptionally well.
Mm-hmm
right now. And, you know, that's really where, you know, we think we can leverage the technology to create a workhorse for us to carve out our own bit of space in that, what we think is gonna be a really big market that can support multiple players.
Got it. Quickly on the pipeline, because we're almost out of time. Benchtop long read, is ASHG a reasonable sort of like, time frame? And then, the ultra-high throughput instrument, on the long read side, is 2026 still the right zip code?
We haven't said when we're gonna launch the benchtop system, so I don't wanna get anyone to get over their skis on that. With respect to the ultra-high throughput system, you know, the core technologies are being created right now, and we're actually seeing some pretty remarkable results.
Mm-hmm.
And so, you know, so as we get a little bit further along in terms of wrapping the system around that core technology, we'll be able to kind of more clearly elucidate that, but it, but it's, you know, it is not... it's, it's not gonna happen next year.
Got it. Last question, and we'll get you out of here. How are you feeling about the ramp embedded in the guide? You called out, you know, really good Onso placement expectations in the back half of the year, a few of the PopSeq programs as well. But on those Revio placements that you have baked into that sort of 4Q ramp, what's your latest thinking?
Yeah, I mean, I think, look, we built the forecast looking at the actual sales funnels and you know, conversations with sales reps and customers and you know, the like. So, you know, we do see the world improving from where we are and or where we've been in the last couple of quarters. Let's face it, the first half of twenty twenty-four was really challenging for the company. We're seeing a lot of great results come from our customers and papers being published, and we talked about the expansion in kind of those translational and diagnostic-type opportunities starting to manifest themselves.
Mm-hmm.
So you're seeing a lot of really strong green shoots that give you a lot more, you know, positive confidence towards achieving what is a nice ramp in this, in the second half. And, you know, although it's not where we originally thought our expectations would be, we do think the environment is generally starting to see some signs of improvement, which give us some belief that, you know, that we, that we believe that the second half will be stronger than the first half. And then, you know, and then twenty twenty-five, we'll see when we get there, but, yeah, we're feeling a little bit better.
Got it. Good to know. And, thank you so much for spending the time with me.
Yeah.
Appreciate it.
No, it was a lot of fun. Thank you.