This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:02:54} Our investment business is to focus on high quality businesses at reasonable prices. Cytek went public last year and raised a lot of money in doing so. They are profitable which is very rare for a company which went public in that space in the last year. I understand why Cytometry is important in the research space and why you would purchase full spectrum versus traditional, why mass spectrum didn't work, what's unique about the tubes Cytek use, and how they've driven costs down to be much more accessible. The replacement cycle in industry is four to five years versus 10 years in academia. 

{audio:0:06:29} The big holes I have is not knowing how big the market is, what the purchase decisions are and what share Cytek has versus the competitors. I don't know how much throughput of reagents you get per instrument and what portion of that Cytek is capturing. I have heard of $150,000 throughput per instrument and Cytek currently doing mid-single digits of that but could get to 20% to 30%, but I don't know whether that's pie in the sky or those numbers are real. I'm also wondering if this is a major step forward for the industry and what risk there is of other new technologies on the horizon that change purchasing behavior. Those are the bigger ones but I have specific questions on those. In the US, Cytek does all their own distribution and have their own sales force, but you are in EMEA where they work with distributors so I would like to know how that works, what the relationship are and how you feel about the company.

{audio:0:08:04} Technically, flow cytometry has been in the same place for a long time. The only players in the market were BD and Beckman Coulter. Several companies tried to enter, like Cyto for example and ACEA which was acquired by Agilent. Luminex only plays a role in those accounts with lower throughput and budget. Cytek introduce a new concept, and the first time I saw their technology I wondered why nobody had thought about that before. The detectors they use have existed for a while but nobody put them in a flow cytometer or used the signature on the finger print of the fluorophores. 

{audio:0:09:51} It doesn't start and end with putting the instruments out; you have to change the user mindset and approach to flow cytometry. User behavior is fickle and difficult to change, but we did see changes happen in core facilities and labs as well as immunology applications, such as leukemia and lymphoma profiling. There are two types of clinical panels – the American method and the European method – but everybody is focusing on Eurofluor, which was validated on BD instruments and now on Cytek.

{audio:0:10:52} Is that the CE designation they were looking for?

{audio:0:10:56} No, Eurofluor is the standardized panels to diagnose leukemia and lymphoma. They use MRD or minimal residual disease follow-up to understand how the medication and chemotherapy affects the patient, and flow cytometry was the gold standard until recently. Sequencing and NGS are also used now to do MRD. Eurofluor, on BD instruments, do 12 panels at a time, which is small compared to Cytek's 40 or 50 in one tube, which helps to reduce cost. You can also perform whole profiling for one sample in one tube, which makes a difference in terms of diagnosing and following up with patients. They have huge potential but it depends on the market approach. 

{audio:0:12:34} I see other technologies such as single cell sequencing competing which will result in the disappearance of flow cytometry. The new single cell technologies can do protein and DNA at the same time, which will replace the flow cytometry approach. It's not easy and will take a lot of time as there are no validations or processes implemented yet. Cytek were clever by launching a sorter, but lost out to BD who acquired Cytognos. There is a major change in the diagnostic area. The US has FDA approvals but everybody uses American instruments in their labs without clearance because university labs do their own validations, whereas in Europe they need CE-IVD, which is the In Vitro diagnostic instrumentation label. That is changing and, by next year, they have to become validated under IVDR for instruments and IVDD for reagents. That is a difficult process so BD will spend a lot of time validating their panels and entire bodies, and won't jump into the market like they used to. Cytek recently went through the IVDR validation process and have instruments with IVDR labels on them, which allows them to jump into the market quickly.

{audio:0:15:49} Cytek recently did their validation and focused on ensuring they adapt to the changes which will be in place next year, but BD was already there?

{audio:0:16:08} They have had their validations for a while but Cytek has instruments and no reagents.

{audio:0:16:19} Cytek got the CE validation for reagents on May 25th.

{audio:0:16:24} They were only validated for the leukemia and lymphoma panel, not all panels.

{audio:0:16:51} On May 24th they got the CE marking for a series of cFluor® reagents and their TBNK kit, I thought cFluor® was their whole portfolio of reagents?

{audio:0:17:12} I don't know what they launched last month, but if they have IVDD, they can go to market quicker than their competitors.

{audio:0:17:32} The sentence they used was CE-IVD, for In Vitro diagnostics.

{audio:0:17:56} For TBNK CE under the European Union In Vitro Diagnostic Medical Devices Directive (IVDD) yes, if they have their IVDD, they don't need to modify anything else.

{audio:0:18:14} Yes, that's good. I assume Cytek went with certain catalog numbers for the cFluor® CE-IVD reagents.

{audio:0:18:29} What is that kit use for?

{audio:0:18:32} The TBNK is for leukemia and lymphoma, which is the most important application in flow cytometry. They look at the t-cells, b-cells and immune profiling for patients. Are you interested in the sorter that they launched?

{audio:0:19:15} I am, and I know the sorter is tied to the Aurora system, but people who work in diagnostics prefer Northern Lights over Aurora.

{audio:0:19:27} Clinical diagnostics never use sorters; it is only for pure research applications. Translational labs have doctors who use their own validation methods and they might be interested in a sorter, but a pure clinical lab that diagnoses and follows up with patients will never use a sorter.

{audio:0:19:58} What is the significance of launching the sorter?

{audio:0:20:01} The concept of doing 40 colors in a flow cytometry analyzer was a big play in the market, and they also went all the way to five-way sorting. I assume they will have good sales for that and their pricing is good. BD recently launched a spectrum sorter but what they did wrong, in my opinion, is that added cell imaging to the flow cytometer. That model never worked. There used to be a system called AMNIS but it never got anywhere. Knowing BD well, they will price it very high and it won't work. I understand they priced it at $750,000.

{audio:0:21:28} That is double the Aurora?

{audio:0:21:31} That is a big number and if they did it only for spectrum analysis, they would have taken a big share, but BD is established and know what they are doing, so I don't think they are jumping into that without thinking. They are so busy with validations and antibodies, they are not focusing on instrumentation. There are eight clinical for every two research devices, at least in my EMEA region.

{audio:0:22:31} Are you saying there are eight clinical devices for every two research?

{audio:0:22:42} Yes, but research is much more expensive. The US business model differs to that in Europe, the Middle East and Africa. In the US, they buy instruments and reagents whereas here, whoever supplies the instrument, also supplies the reagents for it. That never worked with Cytek because they didn't have reagents. BD and their distributors place the instrument and run it on a reagent rental. They don't charge for the instrument; they only charge for reagents. They order $80,000 to $250,000 of bulk reagents annually which covers the instrument cost. Contracts are usually between three to five years. Now that Cytek have CE-IVD reagents, it will work better for them because they have a system with two lasers which does up to 18 colors. They have blue and red lasers which are the easiest to maintain, not like BD who has four lasers which constantly have problems with them.

{audio:0:24:14} Does BD work through a distributor or do they go direct to their customers?

{audio:0:24:18} All of them work with distributors in this region but it depends on the country.

{audio:0:24:23} Can you talk me through the economics of a BD reagent lease? How much reagent purchase would they require per year from a lab or research institute?

{audio:0:24:39} BD works with a distributor who will buy the instrument and place it on a site.

{audio:0:24:54} Does the distributor have to buy the instrument from BD?

{audio:0:24:58} Yes, but BD and Cytek don't use that model. Beckman does that because they have some direct channels and their costs are low, so they can give an instrument for free. You won't see manufacturers doing that because most are from the US where it wasn't accepted.

{audio:0:25:23} Does Cytek have a lower penetration in the European market than the US?

{audio:0:25:35} Cytek does well in Europe with Eurofluor sites, and often replace BD instruments. Flow cytometry clinical cells are very different to research cells, and they don't have the expertise to run clinical cells in Europe. Most of their teams are research people, so they will have that problem until they figure it out. They are not in a rush as the setup is not ready yet, unless those panels are back and they do good reagent sales with their CE-IVD instrument.

{audio:0:26:29} Does the TBNK kit help create a better business model for distributors?

{audio:0:26:43} The TBNK is six colors and if they only run it on the blue laser, they will do well with that, especially with the smaller labs who do general lymphocyte counts.

{audio:0:27:11} How many Northern Lights could they sell in the Middle East for that?

{audio:0:27:37} Their channel partner is good and I was part of that team. They have expertise in clinical and their distribution in the Middle East and Africa is good in clinical and translational because they were Illumina distributors for more than 10 years, so they dominate the market. If they have good panels with the instrument, they will take 40% share from BD in three years. This region is growing fast and anything new will be accepted faster than the rest of the world. 

{audio:0:29:01} How many Northern Lights are sold in the region?

{audio:0:29:05} 13 instruments, including Aurora and Northern Lights and one sorter.

{audio:0:29:23} Are there 13 Cytek instruments in total in your region?

{audio:0:29:25} Yes, but most have four/five lasers, very few are two/three laser Northern Lights.

{audio:0:29:42} Are those how many have been sold or the options in the region?

{audio:0:29:50} No, what has been sold to date.

{audio:0:30:00} The installed base of BD is in the hundreds due to Africa and CD8 and CD4 which was the easiest way to diagnose HIV at that time. Today, none of them work because they have only one or two lasers, which is not feasible.

{audio:0:30:35} Will they have to replace all these instruments in future?

{audio:0:30:39} No, because CD4 and CD8 is no longer an accepted diagnostic tool for HIV. Over the past two years in my region, BD and Cytek have installed the same amount of devices, but Beckman Coulter have an established team here and are throwing instruments left and right, and they took a big share from BD in Egypt two or three years ago. They are doing the same thing in UAE today, which is one of the biggest healthcare markets.

{audio:0:31:36} When you say took big market share, is that how much reagents are being sold or is that the number of instruments that are being used daily? How do you define that?

{audio:0:31:51} Beckman Coulter took market share by installing their system and selling reagents. This region – the Middle East and Arabic countries in Africa – is probably $4 million a year of business for BD. If you include Saudi, you can add $1.2 to $1.5 million. You can add the same if you include Turkey. At the whole of Africa, and specifically South Africa, you are looking at $1.2 to $1.5 million as well. In total, it’s an $8 million business for BD. Whereas Cytek is $2 million until now, because they are only selling instruments. South Africa, Saudi and Turkey will have several installations, so that number will jump in the area. I am very skeptical of what Cytek is planning to do. I believe they will be acquired soon.

{audio:0:34:07} Do you know that many of their execs came from BD?

{audio:0:34:13} Yes, all of them have come from BD, but I don't think they will go with BD. There are other companies.

{audio:0:34:27} Not Thermo; have you heard of PerkinElmer?

{audio:0:34:35} PerkinElmer has an eye on them because they bought BioLegend for $4 billion. Nobody buys an antibody company for $4 billion, so I am sure they have something planned. The only company in the market that can be acquired is Cytek.

{audio:0:35:04} I missed that BioLegend went for $4 billion; we were involved with Abcam.

{audio:0:35:11} I don't think they have an IPO.

{audio:0:35:14} Yes, it was a private acquisition; that's wild, that's a big nut.

{audio:0:35:18} The size of their business is less than $80 million, so I think Cytek will have that long term plan, which is not bad if it gets acquired by a big company. PerkinElmer are going in the immunology direction and do not have an instrument, so if I were them, I would do that.

{audio:0:35:58} With both the instrument and reagents you have a powerful presence?

{audio:0:36:04} If you place a Northern Lights in a lab which predominantly does leukemia and lymphoma testing and repeatedly uses the TBNK kit, how much reagent per year will the lab purchase for that one instrument?

{audio:0:36:36} It depends on the type of lab. One of the biggest hospital labs in my region do up to 150,000 on a Northern Lights three laser. That is a purchase number the way Cytek sells, not what we sell as channel partners.

{audio:0:37:05} Will 150,000 be purchased from Cytek or some from Thermo and Perkins?

{audio:0:37:18} If they don't have it, they have to purchase elsewhere, and usually when they design a panel they go with multiple companies. For example, for the Eurofluor, there are things from BioLegend and there used to be things from Cytognos, which now falls under BD. Immunostep also have certain catalog numbers. So these four are available, plus whatever Cytek puts on the table.

{audio:0:37:59} What percentage do you think would end up as Cytek consumables?

{audio:0:38:05} From the profile I know, not much, but if there are new things, that's different.

{audio:0:38:11} Is that 30% or closer to 5%?

{audio:0:38:15} Between 20% and 30%. A smaller throughput lab would spend $50,000 on reagents. 

{audio:0:38:30} Cytek talk a lot about how they want to have the lowest costs, and I've heard from some practitioners they have low reagent prices. How would a Cytek TBNK kit compare price wise versus some of the others?

{audio:0:38:52} It is not how much the kit costs but how many patients you can test with that kit. If you want to do multiplexing on other instruments, you need two, three or even seven tubes, but with Cytek you can put everything in one tube because they have multiple colors. One of my application specialists told me that it will cost 50% less than other kits. That is the beauty of their concept but they do not market that. They market multiple colors instead of one tube, but they should market one tube because very few people will use 40 colors.

{audio:0:40:10} That is great for healthcare systems and will help Cytek sell instruments, but isn't the business about being able to sell reagents?

{audio:0:40:29} The instrument is placed once and it might last five to 10 years.

{audio:0:40:36} They are robust and servicing is not that expensive for those instruments, which is a major income for most medical device instruments. The UV laser is the only expensive part in their instrument and they buy that from outside; I don't think they manufacture their own.

{audio:0:41:02} I was told that it costs 10% of the instrument price for a service contract.

{audio:0:41:12} There are different types of contracts. Medical device companies have a premium one which includes parts and labor and one or two preventive maintenance visits per year. If it's clinical, they have to do that whereas with research they don't do many PMs. 10% is low compared to the industry; usually it's closer to between 12% and 15% per instrument.

{audio:0:41:58} Is that per year or the total cost of the service plan?

{audio:0:42:05} What margin does Cytek make on that?

{audio:0:42:10} If they have a robust instrument, I assume that is pure margin. Service in the medical industry is always high margins and the Cytek flow cytometry instrument has few moving parts. The fluidics are cheap to change and the optics work fine for a very long time.

{audio:0:42:49} Does the Northern Lights cost between $140,000 and $180,000?

{audio:0:43:10} It starts at $80,000 for one laser.

{audio:0:43:17} Let's call it $100,000 to have round numbers for this.

{audio:0:43:27} Yes, you're talking about $10,000. They reached 900 installations so $25,000 is a fair average, because whoever buys service, buys it for the high-end instrument. For a low-end instrument with one laser, they wouldn't pay $10,000 for servicing. You also need to consider the sorter as an instrument.

{audio:0:43:59} Is the sorter plus instrument $385,000?

{audio:0:44:02} The latest sorter they released will sell for $500,000.

{audio:0:44:11} The service plan doesn't cover year one, but do you typically own these for five to 10 years?

{audio:0:44:22} The average life span is seven years. The first two years of warranty is free for most medical equipment. You start paying for servicing from the third year onwards and for five years after that, at 10% to 15%. If they still charge 10%, that's lower than the market.

{audio:0:45:02} The person who told me that purchases many, so may get a deal.

{audio:0:45:08} Yes, that might make sense.

{audio:0:45:11} If they service 50 instruments at once, the cost might be better than one.

{audio:0:45:23} Who would buy 50 instruments?

{audio:0:45:32} A large biotech, outfitting a full cytometry division.

{audio:0:46:11} If we are talking about bio pharma that is doing R&D and have drugs outside and you're talking globally, they might have 50 instruments, but nobody purchases all at once.

{audio:0:46:26} He said it was spread across years, not at once.

{audio:0:46:31} 50 is still a high number for flow cytometry. If a lab has one, they might go for a second one, and if a biotech company has a flow lab, that's all they need in their facility. They wouldn't go for a second lab. It is like a PCR machine or sequencer; even sequencers are going to multiple labs in the same facility.

Cytek Biosciences: A Distributor Perspective

Former Director at AGBL Group, a Cytek Distributor

inpractise.com/articles/cytek-biosciences-distributor-perspective

Cytek Biosciences: A Distributor Perspective(August 7, 2022)

Former Director at AGBL Group, a Cytek Distributor

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