10x Genomics, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the 10x Genomics Second Quarter 2020 Earnings Conference. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Eric Jaschke, Director of Investor Relations and Strategic Finance. Please go ahead.

Thank you. Earlier today, 10x Genomics released financial results for the second quarter ended June 30, 2020. If you have not received this news release or if you'd like to be added to the company's distribution list, please send an email to investors@10xgenomics.com. An archived webcast of this call will be available on the Investor tab of the company's website, 10xgenomics.com, for at least 45 days following this call. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on these forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release 10x Genomics issued today and in the documents and reports filed by 10x Genomics from time to time with the Securities and Exchange Commission. 10x Genomics disclaims any intention and/or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Joining the call today are Serge Saxonov, our CEO and Co-Founder; and Justin McAnear, our Chief Financial Officer. In addition, Brad Crutchfield, our Chief Commercial Officer will be available for Q&A. With that, I'd like to turn the call over to Serge.

Thanks, Eric. Good afternoon and thank you for joining our call to review our second quarter 2020 results. I hope you and your families are staying healthy and safe. I'd like to start off the call today by again thanking the amazing team at 10x for their unwavering dedication and incredible execution during this quarter, despite all the challenges they've had to face. I'm always proud of our team and culture, but it's been especially inspiring to see the ability that everyone has shown to adapt and succeed in the face of new obstacles. This perseverance has been critical to ensure that we continue to execute on our plans and take advantage of the opportunities ahead. As expected, the impact of COVID-19 created a challenging environment in the second quarter. Our revenues were down 23% year-over-year at $42.9 million. This decline was a direct result of widespread customer lab closures due to the pandemic. We started the quarter with only 25% of our customer labs open and we exited the quarter with nearly 60% open. So, most of them have been operating at a much reduced capacity. We anticipate that lab closures will continue to impact our business until our customers are fully operational. That said, once we pass the short-term disruption, I'm more confident than ever in our mission and in our business. It is clear that the current events have reinforced the importance of mastering biology, not just among researchers but among the broader public as well. As just one example, finalizing the proposed increase for next year's NIH budget will be one of the largest in decades. In many ways, the COVID pandemic is likely to become a catalyzing event for accelerating the century of biology. On today's call, I will start with a review of our commercial progress during the quarter. Next, I will discuss the operational highlights, including the launch of several breakthrough products. I’ll also discuss our thinking about the future and then business we are making to capitalize on long-term opportunities. I will then turn the call over to Justin for a more detailed look at our financials, including additional detail on the impact from COVID-19 during the second quarter. Starting with our commercial business, despite the impact from widespread lab closures, we were encouraged by several dynamics we saw throughout the quarter. Importantly, there was continued and high level of engagement from our customers, while they were away from their labs, but planning for their eventual return. We also saw strong demand for our instruments, particularly driven by COVID-19 related research, which often required placing the Chromium Controller in a biosafety lab. On select occasions, because of the urgency of their work, we provided some customers with strategic discounts on instruments used directly in COVID-19 research. While we're encouraged by the short-term demand for our instruments related to COVID, it's also important to note that the benefits to 10x and to the greater COVID research efforts will be realized over the long-term. The research of the biology of COVID-19 and other infectious diseases enabled by these instruments will likely be perceived far into the future. While the demand for our consumables was significantly reduced during the quarter because of COVID-19, we saw notable tailwinds from our Immune Profiling products. Researchers around the world are using these products to increase the understanding of the SARS-CoV-2 infection, the body's immune response, and in some cases, identify antibodies which may have therapeutic or prophylactic benefits. There are now well over 50 preference and peer-reviewed papers featuring 10x products across these applications. For instance, there have been multiple publications in major journals, in which researchers were able to individually analyze and rapidly identify neutralizing antibodies for the SARS-CoV-2 virus. The research shows great potential for reducing the toll of the pandemic. In fact, several of the most promising COVID-19 treatments making their way to clinical trials are based on neutralizing antibodies. More broadly, we’re encouraged by the many coordinated and collaborative efforts across the scientific community and the speed with which scientists have been making progress in understanding the disease. We’re immensely proud to play a role in supporting these efforts. Now, while the overall usage of our single-cell consumable products was significantly impacted this quarter, the underlying demand remains strong. We experienced continued high engagement from existing customers, as well as robust interest from new potential customers based on high levels of attendance and follow-up in our numerous webinars and virtual events. There are now over 1,000 peer-reviewed publications featuring our single-cell products. These publications serve as validation and an accelerant for future demand because they demonstrate the value of single-cell approaches across just about every area of biology and disease, spanning the spectrum from basic exploratory science to translational work with clinical applications. And of course, the COVID-19 pandemic is a stark demonstration that when faced with an urgent need for drugs in the biology of a disease, single-cell approaches are essential. Turning now to spatial, we saw continued enthusiasm for our Visium platform, particularly once researchers were able to come back to their labs. In addition to the strong adoption of Visium with existing Chromium users, we have seen continued uptake with customers who were entirely new to 10x. Furthermore, a substantial fraction of the Visium business last quarter was driven by repeat customers. We're encouraged by the strength because it speaks to customer enthusiasm, especially given that the platform was launched only a short time ago. We have been excited to see a wide range of applications and use cases that our customers are pursuing with Visium. In particular, we have been seeing continuous interest from translational researchers. Responding to this interest, we formally announced the launch of the Visium Clinical Translational Research Network in June. With vendors including global industry leaders like GSK, Johns Hopkins and Mass General, this network will function as a collaborative research community. It will aim to accelerate the expansion of Visium into clinical translational studies, and to enable discoveries across multiple disease areas, including oncology, neurology, and immunology. With this program, we provide our members with exclusive access to specialized support and various discounts on Visium products. Many of the participants have already started their work and we expect publications to begin rolling out later this year. Now, turning to internal execution. We have been working to meet the significant operational challenges that the COVID-19 pandemic imposed on the business. Our product development teams as well as our manufacturing, shipping and customer service functions need to be on site. On our last earnings call, we expressed our commitment to ensure a safe work environment for all of our employees. With that imperative in mind, we implemented novel programs to provide recurring SARS-CoV-2 testing for all employees at our Pleasanton headquarters who were unable to accomplish their jobs remotely. This step is just a part of our comprehensive approach to maintaining a safe workplace, that also includes digital employee symptom screening and risk factor assessment, provision of personal protective equipment, and other preventative procedures. With the testing program and other measures in place, we have been able to dramatically increase our R&D productivity relative to the height of the shutdown. Furthermore, we have been able to maintain our production, shipping, and customer service functions throughout the pandemic. We also pushed forward the implementation of a long-term cloud-based ERP system in the second quarter. We believe the new system will enable increased automation and operational clarity and serve as a foundation to help us scale the business in the years ahead. Despite COVID-related challenges, we substantially completed the transition onto this platform in early July as planned. Now, in the first quarter, we laid out an ambitious roadmap of new products and applications, and we have been executing on this roadmap having now launched multiple products so far this year with more on the way. This has been a great operational achievement by our team given the challenging environment and the large number of unexpected obstacles. We believe that many of these newly announced products will enable significant new research and exciting new discoveries across biology. And I will now give an overview of the products we have launched so far this year, starting with our Chromium Targeted Gene Expression solution. By allowing customers to focus on the cell types and biomarkers that matter most to their research, the solution is designed to enable them to answer biological questions quickly, efficiently and cost-effectively. By moving beyond unbiased discovery and into targeted research, we have pre-defined and custom channels. Our targeted solution will accelerate adoption of 10x in cancer and immunology research and drug discovery, as well as among a much wider group of customers within basic science research. These products are currently shipping to all 10x customers. We have consistently heard intense interest from our customers in the ability to simultaneously profile gene expression and epigenetic programming from the same cell across many thousands of cells at once. To satisfy this demand, we have developed and began taking orders earlier today for our Single-cell Multiome ATAC+Gene Expression product, providing our customers with a unified view of the cell's gene expression profile and its epigenetic landscape. The potential of this technology is profoundly exciting because it seeks to respond to central challenges in understanding human biology and can provide fundamental new insights across many diseases. In July, we announced the launch of a new product that we have not talked about previously. This was Version 2 of our Chromium single-cell immune profiling solution. Notably, this product extends the capabilities of the original version and offers up to a 60% increase in gene detection sensitivity. This increase in sensitivity allows our customers the possibility to either reduce the sequencing costs while preserving biological insights or access increasingly rare gene transcripts. We believe this product will be an important tool for adapting the state-of-the-art in immune genomics and will have powerful applications across many areas, including infectious disease, cancer, and autoimmunity. We expect to begin shipping this product imminently. Now turning to Visium. Similar to the targeted solution on Chromium, our targeted Visium gene expression product will allow researchers to focus on the cell types and biomarkers of interest while also maintaining the spatial arrangement of these cells within their tissue sample. We believe that this will be particularly useful in translational settings and allow researchers to balance cost with biological insight. We expect to begin shipments in September. Since our last earnings call, we also started shipping Visium Spatial Gene Expression with Immunofluorescence solutions, which extend Visium to protein analysis. With this solution, researchers are able to perform whole transcriptome spatial analysis and immunofluorescence protein detection in parallel. This capability is likely to open up a lot of fascinating areas of discovery. Within neuroscience, for example, we have seen customers compare Alzheimer's post-mortem brain tissue to normal brain tissue using immunofluorescence to look at cell types within tissue and overlaying gene expression data via Visium. Lastly, I want to touch on our integrated software. In early July, we launched the latest version of our data analysis pipeline, Cell Ranger 4.0, which adds support for targeted gene expression analysis. Importantly, Cell Ranger 4.0 also increases gene analysis speeds by a factor of four while continuing to run on conventional CPUs, making these benefits available to all of our customers without additional investments in specialized hardware. As we keep developing and launching new products, we continue to make significant investments in our patent portfolio to protect these incredible innovations. As I joined the team, we had over 250 patents issued or allowed, and over 500 patents pending. We had over 100 new patent filings, and almost 50 patents issued or allowed in the second quarter alone, including broad intellectual property addressing spatial and multi-omics approaches. The pandemic has highlighted the ability of our team to make relentless progress through the short-term challenges. At the same time, within 10x we keep focus on the long-term, and the vast set of opportunities enabled by the century of biology. As we look to the future, we see more exciting opportunities ahead of us than ever before. And at the same time, our confidence in our ability to capitalize on them is stronger than ever. We want to keep investing in the business to build on our momentum thus far and to create stronger foundations for future growth. Within R&D we remain intensely focused on maintaining our culture of rapid innovation and robust product development. As we look beyond the COVID crisis, we intend to accelerate investment in R&D to continue improving existing products and launching new ones. We will keep making investments in intellectual property to protect these products and within our commercial organization we will continue to build out our sales force across key geographies around the world, as well as invest in capabilities to address the interest we are seeing from the biopharma and translational markets. So in summary, this was a tough quarter but our team executed remarkably well. While the near-term environment is likely to remain uncertain, the long-term fundamentals of our markets are very strong. The importance of our mission is as clear as ever and we will drive to provide the technologies needed to accelerate the massive biology and advance human health. With that, I will now turn the call over to Justin for more details on our financials.

Thank you, Serge. Total revenue for the three months ended June 30, 2020, was $42.9 million, compared to $55.8 million for the prior year period, representing a 23% decrease year-over-year. Consumables revenue was $34.2 million, which decreased 27% over the prior year period. Instrument revenue was $7.3 million, which decreased 12% over the prior year period. Service revenue was $1.5 million, which increased 48% over the prior year period. Consumable revenue was impacted this quarter due to lab closures having a direct impact on the ability of researchers to perform experiments using our products. Instrument revenue was also impacted this quarter, due to lower ASPs primarily related to the strategic discounting of COVID-related placements. Service revenue was not materially impacted. North America revenue for the second quarter was $20.3 million, which decreased 39% over the prior year period. EMEA revenue for the second quarter was $11.7 million, which decreased 4% over the prior year period. APAC revenue for the second quarter was $10.9 million, which increased 3% over the prior year period. The decline in revenue this quarter was the direct result of widespread customer lab closures. We started the second quarter with about 25% of customer labs open. In mid-June as conditions began to improve we saw a modest acceleration in U.S. lab openings, which continued through the final two weeks of the quarter. By quarter end, we estimated that approximately 60% of our accounts in aggregate were open for general research with a majority of those operating at a much reduced capacity. Labs within the U.S. were closed throughout most of the quarter with a modest acceleration in openings beginning in mid-June and continuing through the final two weeks of the quarter. Labs in EMEA began to reopen slightly ahead of those in North America. The recovery experienced in APAC, primarily driven by China towards the end of the first quarter, held into the second quarter, and the percentage of labs closed in that region remained fairly consistent throughout the quarter. Thus, the net impact for our Q2 revenue was primarily driven by customer lab closures in North America, and to a lesser extent, those in EMEA and APAC. We believe the rate of lab reopenings will remain unpredictable, and at this time it is unclear how unknown factors such as resurgent case counts or another wave of infections may impact the pace of lab reopenings in the coming quarters. Now, turning to the rest of the income statement. Gross profit for the second quarter of 2020 was $32.9 million, compared to a gross profit of $40.8 million for the prior year period. Gross margin for the second quarter was 77% compared to 73% for the second quarter of 2019. The gross margin increase was primarily driven by lower accrued royalties related to ongoing litigation, partially offset by charges related to idle capacity, and the continued build-out of our manufacturing facility in Singapore. Total operating expenses for the second quarter of 2020 were $72.3 million, an increase of 41% from $51.2 million for the second quarter of 2019. This was primarily attributable to increased personnel-related expenses related to ongoing expansion within R&D and the commercial organizations, stock-based compensation, increased infrastructure spending, legal expenses, and the administrative costs of becoming a public company. R&D expenses for the second quarter of 2020 were $27.5 million, compared to $18 million for the second quarter of 2019. This was driven primarily by $8.2 million of increased personnel-related expenses, including stock-based compensation, and a $1.3 million increase in allocated costs for facilities and information technology. SG&A expenses for the second quarter were $44.4 million compared to $32.6 million for the second quarter of 2019, with the increase driven primarily by $8.8 million of increased personnel-related expenses, including stock-based compensation, and $1.4 million of increased legal expenses. Operating loss for the second quarter was $39.4 million, compared to a loss of $10.4 million for the second quarter of 2019. This includes $13.9 million of stock-based compensation for the second quarter of 2020, compared to $3 million for the second quarter of 2019. Net loss for the period was $40.2 million, compared to a net loss of $10.9 million for the second quarter of 2019. We ended Q2 2020 with $339.8 million in cash and cash equivalents. While we are encouraged by the recent trends, there remains near-term uncertainty related to COVID-19 and we will refrain from reinstating guidance at this time. At this point, I'll turn it back to Serge.

Thanks, Justin. Before closing, I want to again thank everyone at 10x for all of your efforts this past quarter. It's been amazing to see how well you have executed and I could not be more proud to be part of the team. Despite the potential for near-term volatility, we're as confident as ever about the long-term opportunities ahead for 10x and we're committed to making the necessary investments to capitalize on these opportunities. This is the future of biology, and we're just getting started. With that, we will now open it up for questions.

Your first question comes from Tycho Peterson with JPMorgan. Your line is now open.

Serge, maybe I'll start with the Clinical Translational Research Network. Can you maybe just help us think about that in context, the 45 biopharma customers, how material that could be in terms of the volume and volume ramping utilization levels and will this also drive Chromium Connect placements as well? Thanks.

I would caution against assuming a significant near-term revenue impact. However, in the long run, we see this as a potential driver for both the clinical and pharmaceutical markets. The same applies to the Connect front. These steps and investments we are implementing for market development should start yielding results in the coming year and beyond.

And then on the COVID dynamic, are you able to put any metrics around, just size of the opportunity. And should we mainly think about it as impacting the Immune Profiling v2 product that you have added, is that the main driver?

To the Immune Profiling product, certainly COVID has a significant tailwind for that product, but it's going to have certainly have its applications well beyond just COVID, cancer or immunotherapy. So those are big drivers for that product as well. As far as the COVID tailwinds are concerned, they are definitely there. They're substantial. But I would say relatively speaking the tailwind comparison to the headwind as far as operating through the lab closures.

Okay. And then just two housekeeping ones to quite hop off. On Visium, you didn't give an updated number of labs. You did that the last two quarters. Are you able to talk on how many customer sites are using Visium? And then secondly, on FFPE, I'm just curious, is that still on deck for early next year? Thanks.

In terms of customers for Visium, the number of sites is over 600, indicating a significant increase over the last quarter. Regarding FFPE for Visium, it is still scheduled for the first half of next year.

Your next question comes from the line of Derik De Bruin of Bank of America. Your line is now open.

I understand there are many factors at play, but could you provide insight into the difference in demand? Specifically, if 60% of your labs were operational at the end of the quarter, starting around the middle of the quarter, I’m curious about the revenue contribution in the last two weeks. I’m trying to grasp the situation to help with future projections.

Hey, Derik. This is Justin. I'll take that. Typically, we do see a higher concentration of revenue in a normal quarter, particularly in the last few weeks. In Q2, we did see more weighting, particularly in the last two weeks of June than we normally see. And I do think that that was related to a number of customers that were shut down for the majority of the quarter that opened up around the same time. So we did see a spike during those last couple of weeks. I think it remains to be seen what that would look like steady state as the customers then moved to be out of sync with one another.

And I guess, we heard some other companies have mentioned about people worried about not getting their hands on supplies going forward, and any sense of stocking or people buying ahead of when they think things are going to open up in that sense?

No, we didn't see any indications of any kind of pull forward or buy ahead from customers.

Got it. You're clearly very focused on the U.S. academic market. Can you share what you're hearing from your customers regarding their lab openings? How many labs are partially staffed versus fully operational? Do you have any insight into the distribution of this? I understand that most are still operating at reduced capacity, but could you provide more details on that? Is there any correlation based on the size or type of institution? Additionally, can you share more insights on what you're observing in this crucial market segment?

Hey Derik, this is Brad. I'll take that. It's really a mixed situation. Assuming that customers are facing similar issues as others, like childcare and various disruptions, local circumstances are evolving. When we had our call last quarter, we believed that the South was reopening quickly, which seemed promising for the future, but the coasts are lagging behind in their recovery. Currently, institutions are trying to manage getting as many people into the lab through different shifts while adhering to social distancing, which definitely affects their capacity.

Got it. And I guess, if I missed it in your remarks, my apologies, but did you give a number for how many Chromium Connect you placed?

No, we are separating the Connect from the regular Chromium Controller at this time, and we will provide an update on the total installed base at our annual meeting.

One final question before my competitors kill me. The ramp in the Visium, are you seeing people reordering? Is it mostly new people? I guess can you give us some flavor on how does experiments are ramping and how people are ordering? Is it new customers, is it reorders, is it people expanding experiments if they try it? Just some flavor on the ramp?

Yes, we have definitely noticed strong reorder rates, with users adopting the product and increasing the scale of their experiments and the number of samples. The second quarter and limited lab access were challenges. However, we are impressed by the variety of use cases and their progression towards publications. We are eager for the publications that are already emerging in bioarchive, and as more releases occur throughout this year, we expect to broaden the overall perspective for you.

Your next question comes from the line of Doug Schenkel of Cowen. Your line is now open.

My first one is one, which I think I know the answer to, but I want to ask it anyway. When we look at the pace of operational investment and your commentary on the outlook for continued investment in growth initiatives, I just want to make sure that we should view that as really a sign of confidence that first, you're seeing robust demand, albeit somewhat deferred for your products? And that, along those lines on your confidence that the likely duration of deferrals doesn't warrant any real material slowdown in the pace of investing in long-term growth opportunities?

Absolutely. We need to consider many leading indicators when assessing demand, as I mentioned earlier. This involves evaluating long-term demand and the evolving perspectives of our customers regarding future technology. We are optimistic about the situation. While we acknowledge that we are currently facing a short-term disruption, we are confident that post-pandemic, there will be significant business opportunities for us.

Okay. Makes sense. And you talked a little bit about what's going on in the end markets. I guess, just from a promotional standpoint and how you're prioritizing things. As biopharma labs in general seem to reopen a bit more quickly than some of the academic research centers. Were you able to make, I guess, kind of commercial lemonade out of lemons in a way and really just kind of pivot and maybe be a bit more aggressive in going after some of those pharma commercial accounts that may have been a bit harder to penetrate and prioritize historically?

Doug, this is Brad. In biopharma, the perception varies based on size. Larger biopharma companies tend to be more integrated with academic institutions and faced more challenges in their employee programs to return to the lab. In contrast, smaller biotechs were able to reopen more rapidly. Overall, we've been focusing on pharma, especially during the pandemic, and we have several programs aimed at extending beyond discovery into operational or validation platforms, which we are progressing on. Over time, we've been able to adapt quickly and maintain customer engagement. However, by the end of the quarter, other companies also returned, and we were all engaging with customers through Zoom calls, so there was a balance in that. Generally, we viewed this period as an opportunity to turn difficulties into advantages, regardless of how challenging it was.

Thank you, Brad. Regarding your last point, while there is a sense of Zoom fatigue, we are experiencing a rise in virtual interactions and e-detailing in diagnostics. In research tools, there is a strong emphasis on helping our lab customers resume work when they are away from the lab. This poses challenges, particularly since many users may not have access to a Chromium in their lab, and Visium is a consumable solution that does not require a dedicated instrument for spatial profiling. I'm curious if these factors, along with the lower cost of entry for your technology, have improved your position for adoption and usage as organizations adapt to this environment, especially considering that it seems this situation will persist longer than we initially anticipated.

Yes, those are really good questions. I think the most important thing is the idea of a fast start. And that's kind of what you described as a benefit for our business, both in terms of being able to get the capital to buy it. So, obviously, that helps with the Chromium, and certainly Visium is very easy, in essence, because there's no capital. So, a key point to our success is the fast start and that's when we go to our support organization in our ability both Visium and Chromium to successfully onboard customers, and we will do that with a lot of digital tools that we already have in place, not expecting the fact that would be our only asset. So, that start has allowed us to get even customers with Visium who got into their lives at the end of the quarter, again, didn't have any capital investment and we were able, through our support organization to get them up and running and doing experiments and getting data. The other thing I'll point out and you kind of touched on this is that we have a lot of capacity for our instruments, so we have a lot of people who use our instruments, the so-called halo users which ultimately become useful as opportunities for us to sell a Chromium instrument to. Well in a world right now where there's a lot of controls about buildings and what floors you can go on and all that is we're starting to see a lot more interest and helping us drive fast placements as well.

Your next question comes from the line of Luke Sergott of Evercore ISI. Your line is now open.

Maybe another way to rephrase Derik's question is about the pace of recovery. Considering the 60% of the labs that are now open, how has their capacity changed? I know you've mentioned reduced capacity previously, but before they were operating at 20%. Has their capacity increased since then? Are you observing that it is leveling off at around 60%, with the other labs initially at 20% gradually increasing to 60%?

I will take this one. It's interesting, because it's all over the map. We have examples in Germany where you have institutions that are almost fully operational at this point. And then we have most of the big U.S. labs that customers even go to the coast, are operating, probably around 50% capacity. And again, I just always warn that opening, close capacity is a good number. And we certainly literally watch that on a weekly basis. But remember, in some cases, even labs that are open maybe only 20% will be consuming a lot of our product because it's really at that front end of the experiment sort of sharp end of the experiment I’d like to say. And then you have institutions like the broad that largely shift initially to doing COVID testing, because there was such a demand for testing and have now pivoted almost exclusively to research on the biology of COVID. So, when labs shift like that, that introduces some delay because they're building entirely new workflows and access to the biology, and then obviously they’re contending with the capacity to run our products. So there's really a mixed bag on this one. I don't know, I have to give you more resolution on that, but that's kind of how we look at it.

Can you discuss the demand for these new products as new labs open? Are you experiencing interest in all of the new offerings, and how is that impacting the legacy products? What is your strategy regarding the announcements for these new products, and are you concerned that focusing on them might lead to decreased usage of the older products, affecting overall value?

So, this is still the workforce that’s driving so much insight in biology, our original sort of blockbuster, the expression which we brought successful versions of that product that increased capacity. So that really what we are leading with and even when we look at multi-omic products that are combining measurements, I mean, those are also pivoted on the expression. So again, I wouldn't think that anything we do moves away from that. It just kind of enhances it. But, I think the real thing is when we bring out these products again it’s consistent with our execution in then we’ve for the last several years have laid out a road map to credit our R&D team and our operational team have been executing on that and as Serge pointed out, it’s very difficult time. So, yes, I mean, I think …

Your next question comes from the line of Patrick Donnelly of Citi. Your line is now open.

Great. Thanks. I appreciate the color on the lab openings through June, obviously, a few questions on that. Any insight you guys can provide, obviously it's been another month and a half since then we've seen the cases in the U.S. pickup obviously. Any framework you can provide just around kind of the last month and a half, things have gotten a little worse here in the U.S. in terms of openings, and whatever it may be on the lab side?

Patrick. This is Justin. I'll take that. 60% of the labs were open at the end of Q2, but as Brad said, most were operating at a reduced capacity, some at a much reduced capacity. And there was a pretty wide range of variability amongst those labs. We haven't necessarily seen things get worse since then. Overall, if I were to get some color on how Q3 is shaping up, I would say that our revenue is tracking pretty similar to where we were a year ago.

Okay. Now, that's really helpful, Justin. Thanks for that. And then I guess on the COVID market, how aggressively are you guys going after that? It sounds like you've discounted some instruments to get placements out there. Can you just expand a bit on the demand you're seeing there any way to size the opportunity, potential tailwinds from some of that research?

This is Brad. I believe that SARS-CoV-2 will serve as a significant model for studying the immune system, as there is extensive data regarding the outcomes and responses of the immune system to the virus, including instances of overreactions. There is considerable interest in utilizing this wealth of information and patient outcomes. We are actively promoting this and our various products that focus on biological studies. Over time, I expect to see an increase in longitudinal studies across multiple tissues since they are interconnected and communicate with each other. As Serge mentioned earlier, the pandemic has created an invaluable opportunity for studying and understanding biology. Specifically, SARS will provide an excellent case study.

Maybe just one last one, might be for Serge or Justin. Just on the IP side, maybe just an update there. Obviously, we saw some news last week. Can you just run us through, I guess, what do you guys thought about that and what's left outstanding, any timing expectations in the near-term, in terms of material updates on that side?

So, I will address that, it's Serge. There was a decision regarding significant developments that could occur. There was a point in the original Delaware case, which I reviewed last week or the week before, focusing on this issue. It involves legacy products, nine of them, and next-gen products, creating a somewhat retrospective case. Out of the three elements, two were focused on engagement and responsible return. The damages related to this have already been factored into our financials. There are still some mechanics to finalize in the upcoming decision that will be made in the next few months. After that decision is made, there shouldn’t be any other major updates on the legal front.

Your next question comes from the line of Dan Arias of Stifel. Your line is now open.

Maybe just a couple of follow ups on the ones that have been asked. Starting with delivering a point a bit on the current environment. Are you able Serge or Brad to sort of contrast the percentage of labs that were open, that 60% or so with the percentage of labs that are open and accessible in terms of just being able to install and train? I guess how meaningful is that difference if we're just sort of taking orders, but then thinking about new customers and new installations, maybe in the back half of the year?

Yes, I'll address that. It's interesting because most labs are closed to outside visitors while they focus on their own work, and this trend continues to be widespread. We've observed some changes in Europe, but in the U.S., we have managed to conduct installations for Chromium Connect onsite. Generally, we have adjusted our operations to work under the assumption that everything will continue virtually for a while. We’ve settled into this approach, and we haven't encountered any significant limitations in onboarding customers, although I’m sure potential customers would prefer in-person meetings. Aside from that personal aspect, we have been effectively onboarding new clients.

Okay. And then just maybe on the clinical translation network, in ballpark figures, do you have the percentage of those labs that are Visium users today? And then I'm curious, just thinking about the pricing scheme that's associated with that program, which I believe corporates a little bit of discounting. Would that discounting be expected to be at a level that could be at all meaningful to gross margins?

The vast majority of the CTRNs were new customers. These were new applications. They may have been customers or early adopters, but generally, they were new customers and that's why we chose to enter that marketplace. I don't believe that, based on some of the testing we do with a limited number of samples, it would have a significant impact on the company's gross margin.

And I would just add to that, just overall Visium product does have a lower gross margin than some of our other products. So that does increase materially as a percent of overall revenue. There is going to be some impacts from that, but there's positive impacts to margin over the same time period as well.

Okay. Justin since you chimed in, maybe I'll just finish with one for you there. Can I just sort of expand on the thought that you had to Patrick's question by asking if there's any reason why just given, if you're tracking to flattish in 3Q you can't be up year-over-year in 4Q?

Yes. Regarding Q3, it appears that we are on track to perform similarly to Q3 of last year based on the limited weeks of data we have for this quarter. If the positive trend continues, with more customers not only reopening but also operating at full capacity and allowing outside visits, that would significantly boost our overall revenue. However, there is a possibility that the situation could change for the worse, something we haven't experienced so far, but it's still a risk. Everything depends on how the openings progress between now and the end of the year.

The last question comes from the line of David Westenberg of Guggenheim Securities. Your line is now open.

Hi. Thank you for taking my question. I apologize if I need to repeat myself; I'm in a storm and my phone has dropped several times during the call. My first question is regarding NIH funding, which doesn't seem to be declining right now. We're looking at a budget around $40 billion this year, likely increasing at historic levels. Can you provide insight into how your customers are accessing those funds? Specifically, I'm curious if there could be any demand destruction due to difficulties in accessing that funding. Alternatively, do you see a potential shift in demand, where the amount you would receive in 2020 is similar to what you expect in 2021 or 2022? Or is there a possibility of a catch-up concerning those dollars as NIH funding increases and your customers begin to utilize those funds?

Well, there are a lot of questions. So, what was the first question about demand?

I'm inquiring about how your customers will access NIH funding and if this will lead to any demand destruction, a simple shift in demand, or if we might see a pent-up demand scenario as we approach 2021. There's a notable excitement in the research market post-COVID. When comparing the current situation to before the pandemic, I can envision a scenario where there are more NIH funds available, an encouraging NIH environment, and a clear need from your customers to understand the immune system after COVID.

Yes. The concept of demand destruction is a new term I've noticed other companies using. Clearly, we can't recover lost time, though there may be some opportunity to continue fulfilling experiments as samples are processed. There are challenges because key institutions and core facilities are occupied, along with pent-up demand, some of which is related to COVID. Regarding the NIH, it's important to remember there are two components: extramural and intramural. The intramural budgets are bound by the current fiscal year, meaning those funds must be utilized. We had some questions in a previous call about whether the NIH would alter this, but they decided against it. Thus, we are observing preparations for the end of the quarter or potentially the end of Q3. Looking ahead, I see many parallel opportunities to enhance our business. Research driven by COVID will generate substantial information. Regarding a potential surge in activity, I don't envision a significant catch-up because much of that depends on the underlying biology and sample availability, which I don't see contributing meaningfully to growth.

And then just a second one on Visium. I talked to a service provider who said they would recommend 85% of their single-cell work also have a component.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.