You guys hear me? Okay, we're good. All right, so good afternoon. This is Doug Schenkel from Wolfe Research. It's my pleasure to welcome Serge Saxonov, the CEO of 10x Genomics. 10x is the market leader in single-cell analysis and spatial omics. The company has a long history of leading with innovation in the scientific community. So really excited to have an old friend who I have a ton of respect for in Serge. So thanks for being here.
Thank you.
In terms of just providing a roadmap for this discussion, I thought we would really try to cover three things over the next 25-30 minutes. And lots of sub-bullets to these three bullets, but the first is really just talking about the state of the company and then kind of interweaving how you're feeling about the state of affairs coming out of the election from a business standpoint.
And I think that's a topic I think we need to cover given it's getting a lot of focus. But in all fairness to you and everybody else, it's been a few days and there's not a lot to go on, but we'll at least try to talk about that. So that's the first thing.
The second is hopefully that works better. The second is just talking about the Q3 update and kind of unpacking things like what's going on with the product lineup in terms of some of the new things, the new initiatives you're taking, thoughts on competition and where you are in making some commercial changes. And then in closing, we'll just talk about as much as we can, trends heading into 2025 and the longer-term outlook.
So starting with the state of the company, and I think I was watching football over the weekend and somebody said, "If you're not winning, you got to be learning." So you've been winning for a long time. 2024 hasn't gone as planned. You're not alone in saying that. But as we think about where we are in November, in what has been an uncharacteristically difficult year for 10x, what's your diagnosis of how we got here?
What are the most important things you're focused on in kind of treating the problem, treating the challenges? And where do you think we are in the process of getting to the other side of this?
Right, so looking at 2024, like back to your analogy, winning and learning, one thing I would just start with, we actually learned a lot over the previous several years.
Yes. Yeah.
All those learnings were in some sense kind of were the basis for a number of decisions that we made over the course of this year, as painful as some of these decisions have been. Taking kind of a zoom-out view and looking at where we're at the beginning of the year, we saw that entering the year sort of the macro environment was somewhat more challenging relative to what we had seen before, especially pressure on CapEx and such was beginning to be felt.
But as we progressed through the year, I would say that if anything has intensified, and especially kind of the way that people look at budgets, the uncertainty around budgets, the cautiousness of spending, all of that seemed to have sort of worsened, especially as I think about kind of the midpoint of the year and heading into Q3, that that definitely was one of the stories of the year.
And obviously, we're not unique to that dynamic. That made it a challenge. And I think that sort of exacerbated some of the other challenges that we faced that were more of a function of internal decisions that are specific to the company. So earlier in the year and throughout the year, we had a number of product launches that were pretty fundamental.
We're really excited by them, but these are big product launches across all our product lines. That created a fair amount of friction and transition challenges for our customers. Just sort of the prospect of pushing through the commercial, through sales and everything just introduced quite a few friction points in there as customers were evaluating and transitioning to new products and just kind of trying to decide which way to go.
The big thing is also kind of going back to all the learnings we've gotten over the last past several years. We made a decision in Q3 to embark on a pretty fundamental kind of restructuring of our commercial organization. We had identified kind of a series of problem statements back a few years ago as we were kind of building out our business and realizing that to some extent our revenue scaled ahead of the organization to actually support that revenue.
The complexity of the product line has gotten quite high and only kept getting higher. The sort of breadth of accounts got really high and the types of customers, the number of segments we're serving is also getting high. And we felt like we weren't spending enough attention, not doing as well as we could relative to the opportunity in the pharma, especially in the biopharma segment.
And these are some of the areas we talked about for a while and we tried over the years to kind of address them incrementally by adding more investment here, whether it's biopharma or kind of adding more overlay headcounts to help drive new segments or new customer types. And it became clear that those sort of the incremental changes were not really sufficient and we made pretty significant structural changes to the whole commercial organization to get us into a different structure.
That has been fairly disruptive. Again, we have great people in the organization, really couldn't be more proud of our sales folks, but this was a big change that made it challenging for us to prosecute the commerce and attain revenue in a way that maybe I was expecting earlier in the year. And so as we're proceeding through this transition, especially, certainly feel good about how the product transitions have been happening, ultimately at least where they're headed.
G reat feedback from customers, all kinds of great things. We're still in the process of the sales force transition, but strong conviction, stronger than ever, that this is the right path, the right trajectory we're on. It's going to take some more amount of time, but generally on a good path going forward.
Saying that's really helpful and saying what you just said in a less eloquent way, but there's things you can control, there's things you can't control. You've talked about some of the things that didn't go perfectly that you could control, but I think what I'm hearing is it's going to take time, but you're very comfortable with where you are now and recognizing C-level transitions can be disruptive.
But ultimately they can lead to bringing new skills, different types of leadership in a good way to the business, even though it's still going to take some time. You're comfortable with the direction things are going and the changes that you've made at a senior level.
Yeah, and I would actually say more than comfortable. I'm actually fundamentally very energized. I'm excited about the changes and where the company is going and the additions that we're seeing from these changes.
Last thing on this topic, do you feel different about the market opportunity than you did at the beginning of the year? Recognizing that the world has been tough, but from an opportunity set standpoint, has anything really changed?
That's the funny thing is because you look at our external numbers, you would start questioning, but actually internally, reflecting back to the beginning of the year, a year ago, I would say if anything, the sense of opportunity has increased, improved. I always go back to my first initial lens on everything is kind of looking at it from the fundamental scientific perspective, first principles.
These technologies, single-cell, spatial, fundamental to understanding biology, fundamental to understanding ultimately human health. But we do a lot of customer research. We're looking at funding flows. All of those are looking positive. The kind of how the project starts are trending. All of that is looking good.
And then I also, all of us spend a lot of time in the field and you see kind of especially compared to a year ago, you see kind of more tangible opening up of new application areas. We've always talked, at least in theory, around kind of these new areas of large-scale single-cell analysis around combinatorial screens, perturbation, CRISPR-based screens for drug discovery and just understanding biology.
That was always the promise. But over the course of this past year, it has become a very crisp reality where we have people coming to us with ever larger ideas of the projects they want to do. I used to say about sort of talk about the vision of single-cell becoming a routine use of how you do this on every sample and every project. And that felt kind of back in the day aspirational.
More and more now when I talk to actual customers, they're seeing, yes, they are moving in that direction. They absolutely see that vision. I was actually at Human Cell Atlas meeting just a couple of months ago, and this was an original, one of the big sort of efforts that catalyzed single-cell analysis back in the day. And that initiative, not only is it going, they're actually about to embark on kind of the second generation of their work, looking at way more samples, more types of analysis, more types of work.
So when you're looking either at the fundamental sort of indicators of where the science is going, you look at the mechanics of customer spend, expectations of funding flows, or you're looking at application areas, it's all pointing to a direction of, if anything, we should be more optimistic about the opportunities ahead.
That's great. A good segue to the election question. And again, a little bit unfair, but a question we're asking of everybody. I think specifically for 10x, the areas of heightened uncertainty would be what's going to happen with China in terms of tariffs and potential for retaliation.
And then questions about what happens with the NIH and really science funding. Maybe starting with the latter on the NIH, I don't know if it's possible to quantify your direct or indirect exposure, but I think that would be helpful. And then higher level, any thoughts on, are you more concerned about the outlook for science funding based on what you've been hearing?
Right. Right. So first, just on the sort of numerics side of it, so the way to think about our exposure to NIH, so there is a specific kind of intramural allocating. So NIH, the actual NIH institutes that employ people and spend on tools, so kind of direct spending. And that's single-digit kind of percentage. That's the way to think about it. It's meaningful and useful and important, but in the grand scheme of things, it's relatively minor.
And then there's all this sort of money that NIH allocates in terms of grants to various research institutions and PIs all across the states. And the best way to think about it is that it's in the U.S., so the U.S. is roughly 50%-55% of our business. Then within that, it's academia, which is about 75%. And within that, that's about half of the academic budget. So it's about 20%-25% of total sort of revenue.
And these are multi-year cycles and such, but that's sort of the extent of our exposure, which is obviously significant material, but it's still not absolutely dominant to the business. As far as what to kind of think about the effects of the election, so one thing I would say, first of all, I think part of what we had been seeing sort of macroeconomically in the course of the past year was actually some anticipation of customers and uncertainty around budgets going forward.
Because in talking to customers, there was a lot of budgets were getting tighter. And when you ask why they're getting tighter, it's always kind of like, we don't know what's going to happen. We are not sure. And people are just not embarking on new projects, not embarking on new investments. That has been kind of happening throughout the year.
So to some extent, at least some sort of fraction of this uncertainty and the potential for downside has already been baked in people's spend already, and to that extent, to the extent there's cuts or less spending, that would be more in line with the trend, let's say, that's already been happening as opposed to something new. In terms of how it will sort of play out with sort of the RFK nomination and the rest of that, it's really hard to speculate.
I do think that if you look historically, of all the things out there, NIH tends to be most, has the most bipartisan support, is the most stable of sort of the spending elements there. Everyone wants to ultimately cure disease. I don't think there's a whole lot of argument over that. If you look back to the first Trump administration, NIH actually did fine.
Kept growing like normal. Yeah.
Yeah. And so there's going to be some differences in that allocation and funding. I think in the baseline case, I don't think it's that pessimistic. And then also I would add that maybe the top line is going to fluctuate, but when you look within NIH allocation and where the grants are going, where the money is going, there's a really robust, really strong growth within single-cell and spatial omics. And so we expect that to continue. So even if the sum total is kind of drifting within that, I think we're in a really good position.
Okay. Pivoting to China. Again, I hate to call it a silver lining, but China has been a challenging area for the group for a little while. So it's not like we were coming in with gangbusters China growth anyway for companies in the space. How do you think what transpired and what we've heard from the new administration and folks that are going to be nominated, to the extent you can, changes the outlook for China? If you can comment at all, or is it just too early?
It's probably too early to be definitive. I don't think we have the same kind of exposure to China that other businesses do. I mean, we sell to a lot of academic and sort of hospital markets where it's not sort of within the realm of at least the bull's eye of the strategic priorities in China and so on. So we don't expect there to be a top-down sort of directive to compete against us in a way that might be for some other technologies.
Our business has gotten relatively smaller in China over the past several years, so that also limits exposure. And the other thing is sometimes you have to look at local competition and so on, but that dynamic has been there for quite some amount of time in China as well. We've worked through it and over the course of the past year has actually, I think in many ways, have improved, again, based just the fundamental strength of our products and kind of our team on the ground there.
From a sourcing standpoint, how much exposure, if at all, is there to China?
I think we're pretty well managed and pretty well in a pretty good place.
Okay. Okay. All right. Lots of questions that were not on our radar a week and a half ago. Okay. So somewhat related, just going back to Q3, guidance for the year implies essentially that revenue stays pretty close to Q3 levels in Q4. And that really doesn't, I think, just correct me if I'm wrong, make any assumption for a typical year-end budget flush.
What are the key drivers that could maybe take things higher? Because recognizing everything we talked about, I think you guys tried to take a fairly conservative stance heading into the fourth quarter. Would the biggest driver to upside be more instruments and a more normalized year-end instrument cycle?
Yeah.
Or potential?
Right. I mean, you have to look at it. I think both the way we talked about it on the call and talked about our guidance is that the macro environment has been getting steadily worse, right? And where it's particularly likely to manifest itself and is sort of end of the year kind of dynamics and spending.
So to the extent that you start feeling it or you feel it earlier in the year, you're likely to feel it particularly at the end of the year and particularly in terms of the year-end budget flush where people are going to be, that's where those kinds of decisions and discretionary decisions potentially get made. And also when it comes to, and so from our perspective, it seems like looking where we were, where we are, assuming there's a budget flush doesn't seem like a smart thing to do.
Right. Right. Prudent to assume it's not going to happen, at least based on what we've seen.
Based on what we've seen, right? And so then the other sort of element of sort of this whole macro situation is cautiousness in spending. It particularly affects CapEx, right? Big ticket CapEx items. And so back to your question, to the extent there is upsides, yeah. So to the extent there is upsides as people do, let's say there's more of a pattern on year-end flush than what we are sort of currently projecting, so that could open up some upsides.
And yeah, to the extent that opens up, it's probably more likely to manifest itself in instruments rather than other things. The only thing I would just add there is we do our consumables also tend to be project-based and get ordered and oftentimes in large batches as well. So anyway, but I think largely speaking, kind of your framing here, I think is about it.
Okay. And too early for the new Xenium pricing scheme as an example and getting a little more aggressive there. Is that something that could be a potential source of upside?
We're going to have to see. I mean, we do, so I think what you're referring to is we had some promotions that have been talked about a little bit publicly, so I would just emphasize it is kind of part of our ongoing kind of us doing business. Different times you run different promotions and discounts on different products. It is true that in the current environment, we've learned, back to sort of learnings from this year, that the high list price of Xenium in particular is very challenging in this environment.
We strongly believe in the value proposition and where it is, but again, we've got to meet customers where they currently are, and so we're being particularly good to be accommodating on that front, and so we'll see how that transpires. Again, I wouldn't point to it as being something that's totally outside of ordinary. We always do some amount of promotions across different product lines. We are doing stuff on Xenium this quarter as part of that.
Maybe just to stick with some of the new product launches, you have lowered the cost of single-cell on a per-cell basis very significantly with both the release of the Xo as well as new chemistry that can be used with the iX and the X. Presumably, these solutions open up more of the market, allow you to move, well, I would think deeper into the market funnel. But I'm curious, more importantly, how do you think about it? Are these really initiatives meant to both drive elasticity within existing customers as well as open up adjacent market opportunities?
Yeah. So first of all, kind of just a little bit of nuance and thinking them in sort of internal. So there's the Xo launch, which is a lower-cost instrument that we launched into the market. That is meant to be much more for new customer adoption. So for people for whom CapEx might be a barrier, especially in this environment, it seemed like a reasonable thing for us to get out. To the extent that it's a barrier, let's remove that barrier. The instrument itself runs a subset of our assays.
Now, we've always been, we've been somewhat skeptical whether the CapEx constraint is really that big a barrier because there's a sufficient number of Chromiums, Chromium Xs and iXs out there. They themselves are not limiters on throughput, and people generally have access to instrumentation. But nevertheless, again, in the current environment, we have heard of occasionally people don't have access, and it's like it's a way to don't have CapEx funds. It's a way for new customers to kind of get into the ecosystem.
Separately, we had multiple launches on the consumable side. And the consumable side does tend to be, this is, I think that's the critical element where the questions of elasticity come in. And we've heard this feedback from customers across the years pretty consistently. Love our products, love the technology, love the value they get out of it. But pricing is the one sort of throttler to adoption. And that pricing comes in, and there's multiple sort of dimensions to that.
One is price per cell, and especially kind of more higher throughput customers tend to think about things that way. There's price per sample, which is a lot. I would say kind of probably the majority of customers look at this way. And then price per experiment as well. What is the kind of the smallest quantum of an experiment and how much money you have to spend on that? And all of those we meant to address with our product launches.
So Flex, the GEM-X Flex is a new product that we launched earlier this quarter, started shipping several weeks ago. And there's a headline feature to it in terms of delivering new $0.01 per cell price, which is really, we're really excited about, huge resonance with customers. And we do anticipate it's going to increase substantial use with existing customers and open up new applications with existing customers.
Because as I've been saying earlier, I kind of heard this throughout the year, more and more people knocking on our doors looking to kind of run these very large experiments, and this really kind of delivers to them in a bunch of ways. The product itself has other really nice, really nice advantages, but it definitely serves to lean into a lot of this elasticity.
We also launched another product we actually started shipping just yesterday, this, what's called On-Chip Multiplexing to enable much better price per sample. Now.
Taking on the adjacent costs as well.
Now it's taking on the adjacent costs. It's reducing the cost per sample. When you're just putting your sample through, now it gets down to $600 per sample compared to, say, $1,400 or so that was in the past. You get fewer cells, so kind of high cost per cell, but much lower cost per sample, and that is meant to drive both new users, so new customers coming in want to try.
And they oftentimes get kind of initially hesitant when they see the price per sample, but with this, that becomes kind of quite amenable, and then also just kind of your standard kind of use cases where you run a few samples at a time. Before, each one of those experiments might have been a challenge. Now you can more easily do this. So, the answer to your question is each one in its own way helps with existing, bringing existing customer adoption, but also kind of bringing new use cases, new customers in as well.
Too early to talk about the response to these products?
I think too early to talk.
Including the one from yesterday.
Right. I think too early to talk numerically. Good resonance, like since we've been waiting, kind of really excited to tell the world about them. And now for the past several weeks, we've been getting great feedback. It definitely changed the narrative. I think that was our intention, and it definitely has landed well in terms of, again, people's view was like 10x always makes great products, but the question is, is it affordable? Can I do this?
And it definitely changed that narrative pretty materially, where yes, great products, the best products, great value, but also now great price.
There's been lots of focus on competitive dynamics, newer entrants or entrants that have been there that are getting more aggressive. And some have speculated that you've tried to speed up the pace of new launches. Typically, a way just being somebody who looks at Excel a lot that I pick up on things like that would be if there was a change or an expected change in gross margin. I don't think we're expecting that here.
So that leads me to think this was actually always the plan to some degree to roll out this number of new products at this cadence. Is that fair?
Yes, absolutely. And we started talking about the fundamental goal of these products is to broaden single-cell adoption. That's where we're coming from. And again, addressing all the different elements, different barriers, whether it's again, price per cell, whether it's price per experiment, price per sample, or the CapEx constraints, that was always the intention.
We started talking about elasticity in the market kind of in general terms some time ago, kind of started leaning into it more this year in anticipation of these launches. We launched GEM-X first earlier in the year to kind of prepare the world for that transition. And then after that, once it's done, it's sort of these products naturally follow and then GEM-X. So this whole product progression has been definitely kind of a cadence that we had planned out far, far in advance.
These are pretty sophisticated products, and especially launching them with the gross margins that we launched them with, it's like it takes some amount of investment and planning upfront, for sure. They will serve the purpose, of course, as well as addressing competitive dynamics too.
One quick one on competition. We talked about things you can control, things you can't control. We didn't really talk about competition being part of the disruption. Is that a fair observation that it's not new entrants or intensifying competition in either of your key product areas, product categories that are affecting things?
Yeah. I mean, I would say a short answer to that question, at least to the first order, yes, right. I would not put it up there with the other dynamics that I discussed. Kind of clicking one level below that, we have the spatial segments. We have the single-cell on spatial. If anything, the dynamic is a lot less intense than it was, let's say, two years ago. We haven't seen that. That's definitely not sort of the issue that's out there.
And on single-cell side, there's been sort of, like I mentioned, there's been kind of this dynamic of new entrants into the space, for sure. But that has been there now for the past couple of years. There's been somewhat more aggressiveness, I would say, lately. But the dynamic is fundamentally very similar where customers do, they look at these new technologies, they trial them.
By and large, they come back to us. And in fact, over the course of this year, we've seen more people coming back to us more readily because of the new launches and the advantages of pricing and with GEM-X coming to the market as well. So again, while the dynamic has been there and has been in parts getting some of these new entrants have been more aggressive with giving away products, giving really huge discounts and going after our customers, I wouldn't call it kind of like a first-order effect.
Pulling this all together as we wrap up, you sound really enthused about where the portfolio is right now. You seem very comfortable with the leadership team that's in place, and you have the commercial org, I think, where you want it to be. These things don't turn a corner in weeks.
But as we sit here with, I think, relatively low expectations for the next few quarters from a revenue growth standpoint, at least when we look at consensus numbers, do you feel comfortable you can turn the corner on things and really aggressively be playing offense within not years, but months or quarters? Is that fair?
I want to be cautious. We're not guiding to 2025 here. We talked about what we expect from this quarter. We still have work to do building out our commercial organization. I have really huge confidence and really enthused about the leaders we have in place, which is like where it all starts.
Absolutely.
Fundamentally, but it'll take some work. I do think we are going to be increasingly playing from the position of playing offense. I do also, my philosophy is like once you know what needs to get done, it's best to do it as rapidly as possible, and that's part of what happened in Q3.
You certainly learn from that, but fundamentally, my belief is like, yes, you go through a period of pain, but that's how you build great companies. That's how you build outsized value is by making those kinds of investments, by taking on more pain than they might be willing to, almost willing that you can tolerate in the moment, but that's ultimately that makes up more than makes up for it in the long run.
A lot of these kinds of moves we've made back when we were private, small private companies that manifested themselves in these really, really great markets. People weren't necessarily seeing that when we made those moves. This is the same thing, the same feeling I have right now that we made a lot of investments, we made a lot of painful changes, but they've laid a really great foundation for really robust growth ahead for us.
We're like sitting on a threshold of really great markets with like a really enviable lineup of technologies now to take advantage of them.
A fantastic place to leave it. Thank you very much, Serge.
Thank you. Thanks, Doug.