Thanks for joining us at the Stephens Conference. I'm Mason Carrico. I'm an analyst here on the healthcare team. I cover diagnostics, med tech, some of the genomics names. It's my pleasure to be hosting PacBio today. Joining us from the company, we have Todd Friedman, Senior Director of Investor Relations and Treasury. Todd, appreciate you coming. Thanks.
Thanks, Mason. And yeah, thank you to the Stephens team for hosting us, of course.
So you just wrapped up Q3. 2024 has been a tough year for you guys, as well as just the space in general. Obviously, the macro budgets are weighing on demand and growth, but could you talk about why you think that, or why you remain confident that PacBio remains operating in a high-growth, attractive market? Why do you remain positioned to win? Just kind of walking us through that.
Yeah, sure. So it all kind of stems on the fundamental belief that long-read sequencing delivers a more complete, more full, and accurate view of the genome. And that as we develop products and continue to develop products, that, one, close the gap between the price of long-read sequencing and short-read sequencing. Two, it expands the throughput of long-read sequencing and opens it up to more customers by delivering more products that will continue to see a more broader adoption of the sequencing market, which we believe today is roughly $6 billion-$7 billion worth of real money today that's being spent in the market. Then more of that migrates over to long-read sequencing as we make these products more cost-effective, easier to use, invest in the informatics. All that underlying the fundamental belief that a long-read genome delivers a more complete view that ultimately will lead to more discoveries.
Yep. And if we just kind of hit on the last quarter, Q3, instruments were a bit light. Consumables seem to be facing pressure, too. Could you just walk through the trends you're seeing across the business right now, maybe by geography as well?
Yeah. So you're right. Q3, we did have a few instruments slip there relative to our forecast. A few of those were in the Europe region related to some tender delays. And so those aren't really lost units. That's more just a timing dynamic. On the plus side, we did see record utilization in Europe and EMEA in the Q3 . A lot of bright spots in the Q3 , too. We saw consumables return to sequential growth. We're starting to see a couple of quarters now of sequential growth in consumables and expecting growth in Q4 relative to Q3 in consumables. So the growing Revio install base is driving that, and that's an important part of the growth story. It was a record quarter for Onso as well, our short-read SBB platform.
We ran our promotion in the Q3 , and we saw record placements of that platform. Yeah, we did see some instruments slip in the Q3 for the tender reason we talked about. In the U.S., sales cycles continue to be elongated. That's primarily a function of the broader macroeconomy, higher interest rates, higher inflation, just leading to a lot of the universities, the service providers just taking longer to purchase their products.
So maybe moving to the customer base for Revio or the customer mix of who you're selling to. New customers have made up a pretty significant portion of the mix, really, since you guys launched it. Longer term, I think that is a really attractive dynamic. You're bringing new customers into long-read. But maybe if you could just hit on some of the more near-term dynamics that play out there in terms of maybe new customers, time to get up to speed. I know that Christian had talked about some initiatives to help those customers ramp more quickly. Maybe the macro budget constraints, it makes it harder for us to see that in the financials. So if you could, can you unpack that a little bit for us and talk about what you're seeing in terms of those new customers ramping?
Yeah. No, you're right. So new customers, it's an important metric to us. It shows that customers are making the migration from other sequencing technologies into long-read. And this year, 45% of our Revio customers, our shipments have been to new PacBio customers. And that's very encouraging to see. With that, with new customers, we're seeing that they're taking longer to get up to speed from when they take their Revio instrument to when they get into production mode. And so taking a step back and looking at how that affects pull-through dollars per instrument, that brings down the total average as they take longer to ramp up. So that could be several reasons. It could be customers' labs just aren't ready yet. They could be building out a new sequencing lab in which Revio is going to be a main part of, but the lab's not ready yet.
A lot of them, they're hiring new technicians to run the sequencer. They're waiting on automation equipment. It could be a new project where they're waiting on samples to come in. So there's a lot of reasons, but what we find is just for a lot of those, new customers taking longer to ramp up. And so we are working to make that faster. Some of this is developing the informatics tools so that customers could go on and they have the informatics backend analysis tools that they don't need to develop themselves, and that it's taking them quicker to analyze the data on the backend, helping to provide the automation equipment that's needed to customers. It's creating kitted solutions like our Kinnex kit and our PureTarget kit that allow for turnkey end-to-end solutions. So a lot of those are helping.
But part of it is, too, just taking time for that younger install base to mature.
When it comes to the Sequel II customer base, could you update us on how many of those 300 customers have upgraded at this point to a Revio and how you think the new benchtop launch could potentially catalyze a next tranche of those customers moving over?
Yeah, absolutely. So I'd say close to half of those have upgraded to Revio at this point. Just looking at last quarter, so we're able to take a look at customers' utilization trends, see how often they're running their instruments. And we're seeing that about 150-200 or so Sequel II and IIe, so our legacy platform, they're still utilizing their instruments. They're still sequencing on those instruments. And a lot of those are still prime candidates to upgrade to Revio over time. But I'd say those that don't upgrade to Revio are very likely going to consider Vega, our new benchtop platform, as an upgrade. Vega, compared to Sequel II, is going to offer double the output, lower reagent costs. The footprint is a lot less. You could fit on this table here in front of us. Simplified consumables, no need for nitrogen.
So everything about the end-to-end workflow is completely turnkey. So those 150 to 200 Sequel II and IIe customers, we consider perfect candidates for the Vega upgrade, if not Revio.
I know it's early at this point, maybe too early, but what are the conversations like and excitement around Vega? I mean, what is the funnel starting to look like here?
Yeah, it is early. We announced this platform, I think, exactly two weeks ago now at the annual meeting of the American Society of Human Genetics. And we announced this to 1,300 researchers in the community. And their excitement was clear. The lower list price, the benchtop footprint, all very exciting for people in the research community. Since previously, PacBio sequencing, it's always all the sequencers we offer, they've always been $500,000 and up. And so with the Vega benchtop, it opens up thousands of potential new customers that, because of the price point, haven't been able to sequence themselves with PacBio before. On the first day in the booth, we mentioned it on our earnings call, but a customer came and bought a Vega with their credit card right there on the spot. And so we've received our first orders for Vega.
The potential sales pipeline, our sales funnel, is in the triple digits, and I think what's most exciting about our first look at that sales funnel is over half of those are new customers or potentially new customers if they buy Vega, and that just shows that right off the bat, two weeks into this, the amount of excitement from these new customers already being opportunities in our system to close.
Yeah, that makes sense. And outside of maybe bringing new customers in or maybe looking at it a different way, it's, I guess, the idea of it being a feeder system into Revio over time. I know that that's something that, because you guys haven't had a benchtop before, you don't know the timeline. But as we kind of think about it, what could that timeline look like?
Yeah. And I think that really depends on the application. I think for any customer that is maybe in the human genetics area and you're migrating towards more human genomes, Revio is great for doing genomes. Whereas if you're doing more targeted sequencing, if you're doing metagenomics, maybe you're smaller RNA products, starting off on Vega could be the right system for you. But I mean, you're right. For a lot of customers, that price point before was a big investment for them. So being able to start on Vega for $169,000 and having that platform and getting used to the HiFi chemistry and seeing what long-reads could do to your research, I do see a lot of those customers longer term on that pathway to higher throughput.
Yep. And maybe moving to Revio consumables here. So the new chemistry that you guys announced, price, DNA input advancements, those seem pretty compelling to customers. Is there any way to frame up how much of the market, maybe not even the market, how much existing sample inventory gets opened up by the lower DNA input?
Yeah. So I mean, the amount of samples that now can be run on long-read compared to before with the SPRQ chemistry or SPRQ, we call SPRQ , we believe it's hundreds of thousands to millions more samples are now eligible to be sequenced on long reads that weren't before. And that's mainly because of the DNA input requirement. With the SPRQ chemistry, we've reduced the required DNA by four-fold to 500 nanograms, previously two micrograms. And to put that even in broader context, just four or five years ago, you needed 15 micrograms to get a long-read sequence of human DNA. And so now that's 30 times lower. And what that does, that opens up saliva samples. It opens up FFPE tumor samples, heel prick samples. So a broad range of samples that before, researchers just didn't have enough DNA to sequence with long reads. Now they can.
Or a lot of times, too, you'll biobank individuals, and they'll keep that DNA in that biobank. And that becomes a precious commodity, right? It's going to be very hard to go back to that individual to collect another sample. So that DNA that you do collect, you want to use it in an efficient way. And by lowering the amount, customers are more willing now to do long-read sequencing because they're not wasting or they're not using all of their DNA in one single run, if that makes sense.
Yeah, that does make sense, and what are your expectations in terms of the pace of customer adoption as we move through 2025, by mid-2025, the end of 2025? What percentage of sample volumes do you think move over, and how does that play?
I think mostly all. I think most customers by the end of next year are going to be using SPRQ chemistry. I mean, it's really a no-brainer. You're going to get more output, 33% more output per SMRT Cell. It's a lower, as a result, a lower cost per genome. So it's the most economical, lower DNA input required, as we talked about. I do think there will be some cases where customers finish up their projects that they're currently running just to keep that consistency of the chemistry. But by this time next year, I'd be surprised if most, if not all, are on their way to sequencing with SPRQ.
So how do we think about that from the price elasticity dynamic? I mean, does this unlock enough samples next year that volume more than offsets, at least offsets the pricing decline?
Yeah, I think so. I think it's a 33% improvement in output. So I think that what's going to more than offset that is the amount of samples that are now available to sequence using long-read, doing long-read sequencing. And a good example is we talked to a service provider, and they told us that they actually reject 80% of the samples that come into their lab because there's not enough DNA in the samples that are sent in. So we haven't talked to all the service providers, but that is, yeah, exactly.
How does this kind of change the dynamic with short-read sequencing? I mean, do you think that just the throughput benefit and the price or the cost reduction is enough to start moving more volumes over?
Yeah. And we saw that with Revio. So Revio was a big step forward in terms of long-read sequencing, getting closer to cost parity, getting closer in output comparison. So Revio, it increased our throughput capacity. Revio, compared to Sequel II, by 15-fold, brought our long-read genome down to under $1,000. brings it down to $500. So as each kind of step we take closer to parity to short-read, we see an increase in the amount of DNA output sequenced by our customers. And so we're able to one of the metrics we can track from our customers is how much DNA sequencing output do they produce from their sequencing run. In the Q3 , the total amount increased 60% compared to the Q3 of last year. And so that's an important metric because it shows that the amount of long-read sequencing is significantly increasing.
We see that as a migration, mostly from short-read technologies to long-read as that cost differential comes down.
On that point, maybe specifically the PopGen programs. I know that some of them are facing funding headwinds as well on budget cuts. But how impactful could this chemistry be for those opportunities?
Yeah, I think it makes them even more economical. We already, with Revio before this chemistry launch, we unlocked programs like Estonia that's doing 10,000 genomes. MBRU in Dubai is doing thousands of genomes using Revio. PRECISE in Singapore, they're doing thousands of genomes. So this is going to enable even more genomes to be done using Revio. We could start talking about 15,000, 20,000 genomes. Those projects are conceivable now with this increased output. And so, yeah, I think it's I mean, PopGen, it's a perfect balance between of course, they care about cost and the amount of throughput that they could get and balancing that with the increased information that they get from long-reads. So the more we could help them on the economics front, the easier it is for them to migrate the samples over.
Maybe shifting back to Onso, what are you really seeing in terms of the customer types that are buying these platforms?
Yeah. So like we talked about, Onso is a record quarter in Q3. And it's really across several applications. Primarily, it's oncology and liquid biopsy. That's the sweet spot. We see customers adopting it in that application. We have a first certified service provider, TGen, who is providing that service in oncology to all their customers. So we're seeing that as our primary application. But there's other applications too, in exome sequencing and wastewater surveillance. We have customers doing those applications. And we're in about, I think it's 18 countries now in terms of where we ship to. So it's pretty global and across a broad range of applications.
How much of an impact do you think the promotional pricing had in Q3? Is there anything like you need to take into consideration looking forward?
Yeah. So I think that definitely helped drive a record quarter, for sure. And we wanted to run this promotion, give it a quarter to see how elastic the price was. If we brought it down to $99,000 with a trade-in program, how needle moving is that going to be? And we saw it drove a lot more sales than previous quarters. So that promotion has ended. So there's going to be a higher ASP in Q4. We'll see how that happens with sales in Q4. But we're kind of testing the waters here to see where the right price point is to get the right amount of adoption while balancing the gross margin impact.
Yeah. So with the market response you just essentially saw with this, does it make you more open to promotional pricing across the portfolio?
Yeah. So with Revio, we've had different types of promotions. So this year, we've had what we call a Run Revio promotion. And this actually has quite a few deals have closed because of this, where we lower the CapEx on the upfront CapEx on Revio. But on the back end, the customer is going to pay a little bit more for the consumables until they hit a certain amount. And so for some customers who are capital constrained this year, that promotion helped them get a Revio in-house, but at the same time, really allowed us to not sacrifice from a margin standpoint. With Vega, we have the Vega Access program. And so customers who maybe $169,000 is still a lot of upfront cost. And so even for those lower CapEx customers, $79,000 upfront, they get a Vega.
The first 152 runs, they pay a little bit higher on the reagents, $1,750 versus $1,100. And then once they hit 152 runs, they get back to list price. And so that, we think, is going to. Vega opens up a lot more customers just right off the bat at $169,000. This is, I think, going to go even deeper to some of those even more capital constrained. So we have similar types of promotions for the long-read platforms. Those kind of more maintain the gross margin profile of those systems.
And then on lowering the Revio list, no one pays list, or at least not many people pay list, I don't think. So I think you guys, just to confirm, no material move in the ASP has kind of to set expectation. And again, it's relatively recent, but has that started to fill the top of the funnel, grow conversations?
Yeah, so I think it's too soon to say how that's the funnel building. It's been a couple of weeks now, but it was important that we launched that new list price with Vega, right? Up until a couple of weeks ago, we've only sold one long-read product, and if a customer can't afford that long-read product, which has typically been over $500,000, we would have to discount and at some point either give up on the deal or discount. Now with Vega, as a benchtop and lower-cost option, that's going to help protect that new list price. If a customer comes and they don't have the CapEx, it's fine. We have Vega, and we could get them started on long-read sequencing with Vega.
As time goes on and the economics make sense for them to upgrade and get the lower price per G on a Revio, that option is going to be there for them.
Got it. And for the new chemistry, I realize more throughput price, those offset each other. But does it change or maybe give you more confidence in that 300-400K pull-through framework that you guys have given in the past?
Yeah. So that's just a level set here. When we started the year, that was kind of our initial guesstimate for where Revio throughput would fall, somewhere between 300,000 and 400,000. Where we've seen it settle out this year is around in the 250,000 ballpark. And I think that's probably a fair metric to use over the next couple of quarters, one, because of the continued macro environment challenges that we're working on, working with, and the new customer dynamic that we talked about. Longer term, I do think that the SPRQ chemistry does help bring samples onto the Revio platform, which I think will translate into higher pull-through. If it ends up back in the 300,000s, I think it's too soon to tell. But I do see that longer term as an incremental positive in the long term.
And then on the throughput and cost benefit of the new chemistry, what has that done in terms of clinical conversations? What applications there does it make the most sense? Is it a needle mover to the clinical customers? And really, where, what segments?
Yeah. So I mean, I think it's a needle mover to all customers. And I think what is most probably for the clinical customers is the lower DNA input, maybe less so on the cost. I mean, cost is always better. Lower-cost genome is something they're always going to be looking for. But I think what's big for them is the lower DNA input, especially on the clinical side. They're going to a patient to get DNA. So to have to go back to get a bigger sample is sometimes going to be difficult. We've seen good traction. We've talked about Myriad Genetics. They're building out a carrier screening test using PacBio. Quest is doing a neurological disease panel using PacBio. We talked about Azenta on our last earnings call, who's offering that in their CLIA lab, long-read sequencing using PacBio.
So, I think, yeah, I think all of them, those are all commercial companies. So they're very focused on cost and throughput and economics. So that, I think, does help. But definitely the DNA input.
So moving to the outlook here, you guys talked about seeing trends that give you confidence in return to growth next year. Maybe if you could just unpack that, what are you seeing? What gives you confidence?
Yeah. So it's not that we and I don't think we expect the macro environment to, when the ball drops in this 2025, to automatically improve. I think going into 2025, it's going to look a lot similar to what we're in right now. But what gives us confidence in growth is over the past couple of quarters, we've kind of seen a stabilization in the Revio demand trends. Looking at Q3 over Q2, yeah, we did a few less Revios. But actually, with our Sequel II sales, we actually had more long-read sequencer sales than the quarter before. So we see kind of a stabilization in the Revio trends in terms of CapEx placement. We've had a few quarters now of sequential consumable growth. And so as the install base continues to grow, we expect consumables to continue that up into the right trend.
So into 2025, consumable growth off of the expanding install base, service revenue growth off of that expanding install base. And then on top of that, the launch of Vega. And so a new platform opening up HiFi PacBio sequencing to more customers than we've ever been able to reach before. So I think the launch of that platform is going to be additive. And we're not giving guidance today. But all those put together, we're looking at growth into 2025.
You pulled costs out of the Revio instrument. You've talked about the costs you pulled out of the consumables. How much runway is left there? And is it more about fixed cost leverage from here, or can you actually pull costs out of the per units?
I think it's both. Yeah, I think certainly fixed cost leverage, especially on consumables as those ramp. The Vega consumables use is a very similar architecture of the 25M Revio chip, and so being able to utilize that same architecture as Vega consumables grows, that's going to be accretive to gross margin. On the instrument side, we have taken over 10% of that cost out and do see room for more cost to come out. Actually, some of the cost improvements that we've made, we don't expect to realize until 2025 because we've manufactured those, put them into inventory, and as we sell those in 2025, they'll be realized with the incremental gross margin as we sell that inventory with the lower cost, so I think there's still room on margin on that front and still room to take out cost.
I think on consumables, continuing to improve the manufacturing yield of the SMRT cell. So as we keep making the SMRT cells, the scrap comes down, the waste comes down. A lot of areas like that that we're focused on just taking cost out. So it's not just overhead and fixed cost leverage, but it's extracting cost out of the manufacturing process.
And I'll ask one more here before we open it up to any questions. So you made cost reductions as the macro kind of slowed down, non-demand slowed down. The pace of new product launches has still been pretty good. At this point, with the cost base that you have, do you feel like you can continue to be an innovation leader? Do you have the commercial scale that you need to drive growth? How do you think about that from here?
Yeah. So that's true. So earlier this year, when we revised our long-term guidance lower and we brought down our sales expectations, we made a proportionate reduction in our operating expenses to accommodate the lower revenue. It came from across the organization. Yeah, I think there were some longer-term R&D projects that we deprioritized. We did stay committed to our development of the high-throughput short-read platform and continued development of our ultra-high-throughput long-read platform. So that would be the next generation Revio. And so we continue to work on both of those. So those have stayed in our R&D pipeline. In the commercial org, we more or less maintained a lot of the direct sales reps that we have, so the face-to-face customer contact. We wanted to make sure those weren't disrupted.
We did reduce some of the spans and layers so that those sales reps are now closer to the executive management and that there's more communication between the executive team and the sales team, and it's just a flatter organization, so that's where a lot of the reductions came from, and going into 2025, we'll expect to realize a full year of those cost savings, and we expect that 2025 OpEx to be lower than 24. But really, I mean, when it comes to OpEx, that's thinking about levers that are in our control to take us to being cash flow positive, but that's one of the ones that's most in our control and how we could flex up or down depending on the macro environment we're in and how revenue is looking.
That makes sense. Any questions from the audience? All right. We'll wrap there.
All right, Mason. Thank you.