Yeah, I agree.
Great. Welcome, Dan Brennan. Day two of the TD Cowen Global Healthcare Conference. I cover tools and diagnostics. Please be joined here on stage with Christian Henry, CEO of PacBio. Christian, welcome.
Hey, Dan, how are you doing? Thank you. I'd like to thank Cowen team for the opportunity. It'll be fun.
Awesome. Christian, why don't you start out? You know, we'll dig into AGBT and NIH stuff to kind of get through some of the top-down stuff. Maybe just have some intro comments about, you know, your stock hasn't done well, but the whole tape has been under a lot of pressure with concerns. You guys have been delivering some great innovation. Just walk through some of your key priorities for 2025, if you don't mind starting out.
Yeah. First, I'll just backpedal for one second. In 2024, although it was a challenging year, it was actually one of the most important years in the company's history. We've, for the first time in the company's 20-year history, an end-to-end full product from the amount of DNA you need to do a sequencing run, to the automation, to the targeted sequencing, to now multiple platforms, to bioinformatics that are not only getting cloud-enabled, but also fully integrated. The reason why I start there is because you look at 2025, our objective right now is to capitalize on that. We're going to capitalize in a few key areas. One, the clinical market is really starting to become really important to us. Customers like Quest and Myriad are leveraging our targeted sequencing capabilities to develop tests that short-read sequencing just can't do.
They're replacing legacy technologies with PacBio long-read sequencing. In 2025, you'll see us continue to support and build those relationships. Another core priority in 2025 is continuing the push to drive innovation as we move towards new products. If you look at the grand vision I laid out in 2021, we discussed building a multi-product sequencing portfolio. In the last two years, we've launched three sequencing platforms. We have two more platforms that are in development, an ultra-high-throughput short-read sequencer and an ultra-high-throughput long-read sequencer. In 2025, we will be continuing that push, driving towards the Vega. On Vega, which is the new platform we just launched in November, really driving that expansion because 70% of our sales funnel are new customers. This is an opportunity for us to broaden our footprint into the market to drive long-read sequencing.
We're going to start the push towards FDA clearance on the Vega system as well. That is another key priority in 2025. You layer on top of that, of course, the mother and apple pie. We believe we can grow in 2025. It's a highly uncertain environment. I'm sure we'll get into that. We believe we have the portfolio and the opportunity to get back to growth in 2025. That is a top priority: gross margin expansion. We made a lot of progress in 2024 on driving production costs of our products down. A lot of that you didn't see in the P&L in 2024 because, quite frankly, our inventory levels didn't let us sell through to the lower production cost instrumentation, for example.
As you get into this year, you have gross margin tailwinds, so to speak, because we've lowered the production cost of the Revio, for example. The Vega system, although it'll be lower gross margin at the beginning of the year, by the end of the year, it'll be higher gross margin. On the consumables, we continue to improve the process there to drive yields up, which drive margins up. Those are some of the core priorities kind of as we get the year started. Lot to do.
Yeah, and a lot to talk about. Let's just hit the NIH stuff out of the way in the beginning, and then we can move forward since it's kind of a common refrain here amongst all the companies. Your guide for the year is 1-10%, I think, implied. So, fairly wide, given, I guess, you have a decent amount of academic exposure. Just walk through what the exposure is, what you've baked in. Agilent had a tough first quarter in academic, which caught people by, I guess, surprise. Just trying to think through what's baked in and kind of is there enough cushion? And if it's not, how do we frame the risk profile?
Yeah, I think I don't think any of the companies have a perfect crystal ball, but what we did was we stepped back and took a look at the whole market globally to try to understand what our opportunity is. You're right, the guidance we gave was basically just slightly above 2024 to about 10% growth, give or take. The range there with respect to NIH, when we went into thinking through the guidance, about 15%-20% of our total revenue comes from NIH-derived sources. We assumed that it would be a challenging market, or at least an uncertain market in the first half of the year, and that could extend throughout the whole year.
That's actually offset by what we see as real strength in Europe this year because as Europe is moving in the clinic faster than the United States, particularly in rare and undiagnosed disease, and there's some large population-scale sequencing programs like the one that's going on in Estonia that we'll be sequencing for most of the year, and that will help drive growth. We looked at the combination of the risk to NIH, and particularly on the capital side, and particularly with respect to Revio, since it's a higher capital cost instrument, we assumed that that would be more challenging to make those placements. Therefore, our guidance contemplates Revio placements being down year over year. If NIH doesn't come to the challenges with NIH doesn't really come to pass, that could be an opportunity for the company. We thought through Europe.
We see that as probably our strongest going region. China continues to be challenging, but the reality is we're in a pretty good spot and the business is doing okay right there. To remind everyone, we have a very concentrated customer base. We are not deep in China. We're kind of wide with these concentrated customers. Those customers have sales forces that actually go out and sell long-read services to the market. Those are how we thought about putting the guidance together. It gets noisier every day. I mean, this morning's news with respect to one of our peers, obviously interesting. I don't think there's really a read-through on us. I think we're in a much different position. We're a lot smaller, number one. We haven't historically had any issues. There are not a lot of substitutions for long-read sequencing in the Chinese market.
I don't think we're caught in that draft. Anything could happen. I probably would be more concerned with reaction from the U.S. towards China with respect to the Biosecure Act, for example. I'd be thinking more about that than the China side. Anyway, I think it's a very uncertain time, but I think the guidance we put together kind of contemplates a lot of that.
Okay. Great. We could maybe catch up on that at the end. Let's just talk about AGBT. Kind of what were your key takeaways for the week?
There are a couple of key takeaways. From a PacBio long-read sequencing perspective, the excitement for long-reads grows every single year at that conference. In every customer conversation, the Spark Chemistry that we recently launched, customers are getting the throughput gains that they were looking for. Customers are getting very effective low-input DNA. Now they're actually putting, they're getting more samples onto the sequencer than ever before. I think that that's super powerful for us. One thing that was interesting is that the incremental capacity that each run has now, most customers are not multiplexing more. They're just doing a little bit more coverage, which is fantastic for the company. I know oftentimes investors are concerned with the elasticity of the market and how fast does that change. I think in this case, so far, it doesn't seem as if that's a real issue.
Now, the reality is not all of our customers are on Spark Chemistry yet. A lot of the customers are going through validation of the chemistry, and they implement it more slowly. A lot of customers also are finishing existing experiments. Over time, I suspect virtually everyone to move to Spark because there's just too many advantages. I think that was one core takeaway. I think the other core takeaway is that our competitors and peers are trying to look more like us. They're trying to implement technologies that try to get to some of the fundamental advantages that we have, being really one of the only companies with native long read single- molecule sequencing, the ability for us to see from telomere to telomere, the ability to get a phase genome with every single run, the ability to see all the epigenetics as well as structural variation.
I think that reinforces the fact that long-reads are really important. They're here to stay. I think we have very significant competitive advantages. What the competitors are doing is they're adding cost to their sequencing. Meanwhile, we're lowering costs dramatically. I believe that that gives us a real advantage because as we get closer and closer to cost parity, which I do believe we can achieve, I think that for certain parts of the market, we will have very significant advantage. It gives us a critical opportunity to penetrate more deeply, particularly in the $3 billion-plus germline genomics market, where over time, I think long-read sequencing can penetrate 20%-50% of that market.
Maybe on that front, just as cost parity, Spark obviously takes the cost down a lot. I know you talked about it at AGBT. A lot of the headroom, you talked about a shift that the management team made, which was like, "We're going to step on the gas pedal. We're going to really kind of drive throughput and cost down further." You talked about cost parity. What does cost parity mean and how would you get there and kind of what impact might it have on the business?
Yeah, that's a great question. Cost parity to me means that we are effectively within range of short-read sequencing prices. Now, prices are going to fluctuate. I think last week, one of our competitors now said, "Well, they're going to do $80 a genome." I think one of the target marks that the market's been looking at is the $100 genome. When I think about cost parity, if you're somewhere between $150 and $50, that's cost parity. The reason for that is once you get down below $200 a genome, the reality is the dollar delta between a $150 or $200 genome and a $100 genome or a $50 genome in the grand scheme of an experiment is just not that much. It will start to become all the other factors really play in.
Our thesis, our original thesis was, "Look, if we could be within threefold of a short-read genome, we would see mass adoption." What we did not take into consideration really is the switching costs. The way I think about it today is that we have the technology to get basically to parity with these short-read technologies. You get there. Now the economics are awash, and the switching costs are paid for by the compelling reasons why you moved to long-reads to begin with, particularly in the applications. In the long run, what I think really happens is applications seek the technologies that have the best fit. For example, in liquid biopsy, long-read sequencing may not be the best fit, but in other applications, long-read sequencing will certainly be the best fit.
When economics are taken out of the equation, customers will make decisions based on the technology and what it affords them, which is a very different paradigm from what we all grew up in. We grew up in a paradigm where there was really only one technology that was cost-effective enough to even start to build the market. I am really excited about this new paradigm because you can see it coming. It is happening. It is happening on the clinical side of the market. It is happening in research. Every year you go to these AGBT conferences, our peers are starting to try to look more like us, which I think is very exciting.
We could discuss Revio. We could discuss Vega right now. In terms of this cost parity, is it just further evolution of Spark Chemistry updates? Are you talking about the ultra-high throughput long-read or just kind of what is it really?
Yeah. Sorry, I didn't answer your whole question. With respect to how do we get there? We get there through a couple of different things. We continue to iterate on the Revio system, introducing new workflows, new ways to think about using the SMRT Cells, the ability, for example, to use a SMRT Cell more than one time. All of a sudden, that takes the most expensive part of the consumable and amortizes the cost over more samples than ever before. That helps drive cost down. The reality is it's next generations of SMRT Cells like we did. If you look at the history of PacBio, when we moved to kind of SMRT Cell technology, we went from 1M to 8M, 8M to 25M. M means 25 million ZMWs or zero-mode waveguides per SMRT Cell.
Then when we got to Revio with 25 million, we actually put four of them together. You could look at 100 million molecules simultaneously, which is pretty cool when you think, I mean, even today, when you think about it, Revio has been on the market for a couple of years, but it is. There is another leap beyond that, and there is a leap in multiple dimensions. One dimension is the increase in smart cell, the number of ZMWs on a smart cell. The other dimension potentially is the number of smart cells we put together in a run. That is enabled by dramatic improvements in our ability to have compute algorithms that drive the cost of the compute down to make it practical to do.
We're leveraging advances at NVIDIA and other GPU manufacturers, as well as our own innovation in algorithms to be able to take the cost down. We're at a point now where if you look at our JPMorgan slides, you can see different technologies. They're all far enough along where we can put them together into that next ultra-high throughput next generation system such that you start to see how we could get to cost parity in a reasonably short order. I think you've got us a little, you've got us pretty aggressive, but we haven't really said when that happens, but we said over the next few years.
Okay. In terms of just kind of customer use case, you said at AGBT there was just more and more interest to do long-reads. Yeah, and it's tough to see through this environment because the environment's challenging. You have new competition. Maybe just one more, just kind of back to the competition. Roche is going to come out in a year, a year plus, and they're talking about doing isoform sequencing. Just wondering, I think we spoke about that at AGBT. It's an important unique characteristic of your sequencer, but maybe it's not a big part. Just talk about either Constellation or Roche and these incremental competitors coming in. Are these anything that investors should really think about?
I do think Roche has spoken about potentially doing isoforms, but the truth is the average length of an RNA, a splice variant, is roughly 2 kB or a little longer. I would be surprised if they could actually sequence whole isoforms. That is the same problem that short-read technology has. It cannot sequence the whole molecule. As a result, either the ends, the part of the molecule is unsequenced, so you do not know what the whole isoform is. With ours, when you are starting to look at 15-20 kB reads, you could sequence multiple isoforms in one reaction, and that drives the cost down, the number of reads up, and the utility. I do not think that is going to be a competitive threat to us, at least in the way we understand the world today.
I think if you look at Constellation, what's interesting about Constellation is that it uses a lot of the flow cell. Regardless, it's going to make the experiment more expensive. As we move down the cost curve, it will make us more competitive, number one. Number two, at the end of the day, it still is short-reads put together in some unique way, and you're still not going to have the epigenetics. You're still not going to have truly long reads. They'll have longer reads. Therefore, I think the advantages there are quite frankly limited. So far, customers haven't really given us any indication that they would select that over what we're doing, particularly when we start to show them our roadmap. When we start to show them our roadmap, everyone's going, "Can you go faster?" Yeah.
Maybe Pull Through on the Revio. I think we sat here when you first launched, there was a lot of headroom on it, and there were some analogies to Illumina how much Pull Through could be. Pull Through this year, the guide is a little bit below 24, but it hasn't hit the point hoped for yet during the launch, and there's been a lot of macro headwinds. I guess the question is, you discussed at AGBT the interest level in long-reads, and we've done surveying, and there's certainly interest. If you can tease out, frankly, the launch of Revio so far, how has it gone versus expectations? Have you not got the level of Pull Through that you hoped for? I think last year we discussed maybe there needed to be more education about the real utility of long-reads.
Just trying to think through a lot of headroom, a lot of excitement. It's done well, but hasn't done as well as expected. How much of it's macro? How much of it's competitors bringing down their prices on short-read? How much of it is your own control, maybe more education? Just think through where we are with Revio.
I think with respect to Revio, we're proud of the launch and what we've done, and we've doubled the revenues in the company. Of course, we think we believe that we could do better as we sat up here on stage last year and that obviously didn't transpire. There's a couple, I do think the macro environment has had the predominant impact. However, I also think we, the company, underappreciated the real DNA input challenge.
I think that that has had an impact on Pull Through because anecdotally, we'd hear from customers, "Hey, 70% of the samples in this project wanted to get on the sequencer, but the DNA either wasn't high enough quality or there wasn't enough of it." By shrinking the amount of DNA input material, that allows lower quality DNA because they find the best parts of that lower quality DNA to go on it. It enables new sample types to get on. For example, now we have saliva on our sequencer now where we really didn't have that in 2023. I think the first thing with respect to Pull Through was that we just didn't have access to enough of the market of samples, and now for the first time we do. I think that's really exciting. We'll see how that plays out.
On the instrument side, there's no question the macro environments had an impact. I also think that competing against the incumbent in the market, particularly with their flagship product being launched around the same time as our flagship product, customers don't have unlimited pools of capital, and therefore they would have to make choices on how they're going to allocate. In the survey, yes, we're still interested and we're going to do long-read, but we have to do this other thing first. I think that was thematically a real thing that we had to work through.
I think where we sit in 2025 is that we're in a much better position because we have the whole product, we have more traction, we have the clinical part of the market moving, and therefore on balance, Revio is, I believe, gaining overall momentum in the market. You really are thinking, "Okay, as the macro improves, can you get your unit volumes back up to what you originally thought, kind of in the 30s-40s and beyond?
Talk about Europe. You talked about EMEA and Estonia and POPSEEK and strength there. Why is the strength coming from there? Just how proliferate could that be, these bigger programs? Are there other things in the funnel? Just kind of walk through the opportunity there.
Yeah. I think one of the reasons why I think we're very bullish on EMEA right now is that, first of all, you have many single-payer healthcare systems, and they are really, there's a few key institutions at the forefront of rare and undiagnosed disease research like the Radboud University Medical Center. They have been a huge advocate. Earlier this year, we put out a press release. They're moving our technology into first-line diagnostic for rare and undiagnosed disease. What that means is a patient comes into the hospital, they believe there's some sort of genetic component, they'll put it on a Revio first, which is remarkable. We already saw that happen in 2024 in the United States. Now it's starting to move towards a national scale, and they committed to another 5,000 genomes this year.
In our world, that's a big deal and that's a growth driver. We're also seeing the adoption in the rare and undiagnosed space in countries like Sweden, for example, where they're really trying to push the technology out to the entire country, not just a couple of institutes and led by some of the folks at Karolinska and these leading places. On the biobank side, you have a lot of powerful biobanks in the EMEA region. Yeah, of course, everyone hears about the U.K. biobank and what's gone there, but there's other biobanks, Estonia, Denmark, etc. All of these groups realize that the power of long-read sequencing can really add value to their biobanks. Now we're at economic. Now, most importantly, we're at scale where they can do medium-sized, not the monster project yet, but medium-sized projects and have a very successful outcome.
There is the Middle East where there are all kinds of interesting projects brewing. Those projects take a long time to get across the goal line and get moving, but once they do, they are very powerful because there is a huge unmet need in the Middle East for sequencing and in rare disease in particular.
What about in the U.S. on the clinical aspect? What's happening there? You kind of gave some examples in those countries which they're excited they're moving ahead. Kind of what's the traction like in the U.S.?
Yeah. In the United States, the children's hospitals have been a major source of opportunity for us. People like Children's Mercy, Kansas City, Nationwide, Nationwide Children's in Columbus. I think we're seeing St. Jude, lots of these children's hospitals are adopting long-reads. Children's Mercy in Kansas City really led the way with our technology, and now they're being reimbursed as a first-line test. Other institutions are moving in that path or already there, and I think that's really powerful. I think the other part of the clinical opportunity in the United States really is testing of genes that are very difficult to sequence on long-reads. We talked about that already with Myriad, for example, or with Quest. I think that's going to proliferate. What's really powerful about that is those are scaled opportunities.
They're doing thousands to tens of thousands of samples per year at these major centers. What's really happening is we're replacing legacy technologies. Our workflow is running right alongside short-read sequencing workflows and replacing legacy technology, things like Southern blots and long-range PCRs, where all of these difficult-to-sequence genes, these diagnostic companies, they're super important genes, but the diagnostic companies would have to cause very expensive, less accurate, older technologies. Now they can replace it all with Revio and one workflow to get all these answers. The economics are super compelling for the DX companies, and they're compelling for us too. That's a big win-win for us.
I want to hit Vega, but I think more importantly, I think we need to focus on margins and the balance sheet and kind of this path to profitability. Maybe let's just jump to the path to profitability. Stock's down a lot. The environment's tough. You've got all this innovation. You guys are pushing ahead. You have more innovation ahead. You're exciting hooks in the water here. I think people look at the balance sheet and they say, "Can you get there? Can you get to this free cash flow positivity?" Walk us through where we stand today on that long-term plan. What are some of the building blocks?
So in the last earnings call, we talked about exiting 2027, achieving positive cash flow. In order to get there, we have to do the following. We have to return to some modest growth. Now, modest growth doesn't mean 20% per year growth. It means modest growth. We have to see gross margin expansion from where we are. We don't have to achieve our ultimate gross margin goal. Of course, if we do, that's all good. The viable threshold to get to positive cash flows, you need to be on the way to the 50s in terms of gross margin. As we kind of outlined in our long-term guidance a few years ago, those are still our targets, getting to 55-60% gross margin. It's absolutely plausible that we can get there, but we have to start demonstrating that.
We do not have to get all the way there to achieve what we believe will be positive cash flows, but we need to make progress. The other thing we have to do is we have to be disciplined about spending. You will see year over year, 2025, we expect spending to be down over 2024 levels. A lot of that is due to the fact that we had a pretty significant reduction in force last year. We are going to get the full year benefit of that, but we are remaining diligent and focused and ruthless in how we are prioritizing projects inside the company. We are not willing to sacrifice innovation and these new products to getting to market, but we have to be very focused on our spend.
The last piece, of course, is as part of driving the revenue growth, we really need to make sure we optimize Salesforce efficiency. We have our new Head of Sales who joined on the first day of the sales meeting two weeks ago or three weeks ago now, and he's off to a great start.
Terrific. I think we're out of time. Christian, thank you for the conversation. Thanks, everyone, for being here. I think we have a bio production panel coming up in a few minutes. Louis, you want to do that?
Thank you. Thank you.