Pacific Biosciences of California, Inc.

Thank you for standing by and welcome to the Pacific Biosciences of California Inc. fourth quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Chagin Ward. Please go ahead. Chagin Ward Thank you.

Good afternoon and welcome to the Pacific Biosciences fourth quarter 2020 earnings conference call. We hope that you're keeping well during this time. Earlier today we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the investor section of our website. at www.pacb.com, or alternatively, as furnished on Form 8K, available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer, Susan Kim, Chief Financial Officer, Mark Van Owen, Chief Operating Officer, and Ben Gong, Vice President of Finance. Similar to last quarter, we are hosting our conference call from a number of different locations, so please bear with us if there are any technical issues or pauses. Before we begin, I'd like to remind you that on today's call, we may be making forward-looking statements, including plans and expectations relating to our financial projections, plans and expectations relating to our research and development efforts, plans and expectations including expectations with respect to timing, sales and revenue projections, plans in connection with our collaboration partners, including expectations regarding sales related to our collaboration with Invitae, plans and expectations to grow, accelerate, and expand our product portfolio, commercial efforts, and commercial footprint, including plans related to our products to increase throughput, lower costs, and develop workflows, adoption of our sequencing technology as a transformative and fundamental tool in research, clinical, and genetic testing applications, The use of our technology for specific projects and applications, including in connection with epigenetic, COVID-19, cancer, and rare disease clinical research applications. Potential growth and impact of growing our commercial team and research and development teams. Plans to make COVID-19 protocols widely available to commercial laboratories. the need for more expansive and robust viral surveillance strategies due to the emergence of more infectious COVID-19 mutations, and other future events, such as the impact of COVID-19 pandemic on our business partners, customers, and employees, and the use and advantage of our products in COVID-19 research. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties, and may differ materially from actual results. In particular, the extent of COVID-19's continued impact on our business will depend on several factors, including the severity, duration, and extent of the pandemic, as well as actions taken by governments, businesses, and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed reports on Forms 8K, 10K, and Form 10Q. Pacific Biosciences undertakes no obligation to update forward-looking statements. In addition, please note that today's call is being recorded and will be available for audio replay on our investor section and our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call. I'd now like to turn the call over to Christian.

Thank you, Trevin, and good afternoon, and thank you for joining us today. Before we begin, I'd like to let everyone know that Ben Gong, our Vice President of Finance, is retiring this quarter. As a result, this is his last earnings call. On behalf of all the employees at PacBio, Susan and I would like to thank him for his significant contributions to the company over the past decade. Before the market opened this morning, we announced that SoftBank is making an investment of $900 million in the company to support the acceleration of our growth initiatives. We are excited to partner with SoftBank as they can help us expand our reach on a global scale. We believe that this investment validates our leadership position in long read sequencing and will help us enable us to accelerate the expansion of our product portfolio, expand our commercial footprint, and ultimately to realize our vision that whole genome sequencing using our technology will become a fundamental tool for the use in a broad range of both research and clinical applications. On our last earnings call, I described some of our key priorities, and I am pleased to report that we're making progress on a number of fronts, including our ability to execute and grow the business. For my prepared remarks, I will briefly review our Q4 financial highlights and then describe key business highlights and summarize our expansion efforts, including the addition of several key management hires. Susan will then walk us through the detailed financials for the fourth quarter and provide some thoughts around our outlook for 2021. So, starting with an overview of our Q4 2020 financial results. Total revenue for the quarter was $27.1 million, up 41% sequentially from Q3 of 2020. We exceeded our internal Q4 target for revenue, and we did not see a significant negative impact from the COVID-19 pandemic during the quarter. Instrument revenue, was 13.6 million, up 76% compared to Q3 of 2020. Our newly launched SQL 2E was well received by our customers, which drove an increase in orders. Additionally, we received several multi-system orders from customers like the Wellcome Sanger Institute and Berry Genomics. We delivered and installed 35 new SQL 2 and 2E systems during the fourth quarter, and ended the year with an installed base of 203 SQL 2 and 2E systems. Consumable revenue for the quarter was $10 million, up 25% sequentially from Q3 2020. System utilization on the SQL 2 platform was higher in Q4 2020 than pre-COVID levels. Annualized pull-through on the SQL 2 installed base in Q4 exceeded $180,000 per system, compared with approximately 160,000 K in Q3. We are pleased to see this increase in pull-through. However, we note that Q4 consumable revenue benefited from some seasonal stocking orders, as is typical in the fourth quarter of the year. Susan will provide more details on our financial metrics later in the call. Now, I'd like to provide a few updates and comments regarding the impact of the COVID-19 pandemic on our business. Going into Q4, we were cautious about the potential impact that the resurgence in infection rates in Europe and the United States would have on our sales for the quarter. Fortunately, just about all of our existing customers were operating throughout the quarter, And as I said before, average utilization on SQL 2 systems was higher in Q4 than it was prior to the pandemic. It should be noted that travel limitations did prevent us from installing some systems during the quarter, but the strength of the SQL 2E orders enabled us to overcome these challenges. Looking forward, we believe that the pandemic will continue to cause some uncertainty in our revenue outlook, as shutdowns could impact our ability to install new systems, and we believe that some customers may remain conservative with respect to capital spend. Additionally, on the topic of COVID, the emergence of the more infectious mutations in the UK, South Africa, and elsewhere over the last few months has reinforced the need for more expansive and robust viral surveillance strategies. Governments and public health organizations around the world are moving quickly to identify and track the different COVID strains in their communities. Notably in the United States, the CDC contracted with LabCorp in early January to support the scale-up of COVID sequencing using PacBio HiFi technology. The COVID-19 Whole Genome HiFi sequencing assay was developed as a research collaboration between scientists at the CDC, LabCorp, and PacBio beginning in early 2020. Already this year, LabCorp has purchased several additional SQL 2 systems to ramp up their surveillance testing with hi-fi COVID sequencing, and we look forward to working with LabCorp to continue to scale their operation and service this global need. It's exciting to see that their efforts are already making an impact as LabCorp was the first to identify the new South Africa variant in South Carolina and Virginia just last week. We're pleased to announce that PacBio will now be making this high-throughput protocol widely available to commercial laboratories, academic researchers, and public health institutions globally who wish to stand up robust high-throughput surveillance programs locally. We believe use of PacBio's highly accurate long read HiFi sequencing chemistry for COVID surveillance offers distinct advantages over other technologies, including fewer amplicon dropouts, easier amplicon balancing, and the ability to phase COVID genomes, which can detect the different strains infecting a given individual. We are proud to have contributed to the assay development that LabCorp and the CDC are now using to understand and get ahead of this rapidly mutating virus. We plan to build on this experience to further bring the benefits of our technology to bear in the fight against COVID. Shifting gears to population scale projects, as a result of the pandemic, some delays persist in the ramp up of certain large sequencing projects such as the All of Us Human Genome Sequencing Project in the United States and, to a lesser extent, the Darwin Tree of Life Plant and Animal Sequencing Project in the United Kingdom. However, the Wellcome Sanger Institute, where the Darwin Tree of Life samples are going to be sequenced, has started to prepare its facility to generate 2,000 high-quality reference genomes over the next two years. In anticipation of receiving those samples, The Welcome Sanger Institute ordered seven new SQL 2E systems this past quarter. Some of those systems were installed last quarter, and we expect the balance to be installed in the first half of this year. Moving on to other business highlights, I'd like to discuss our collaboration with Invitae that we announced last month. PacBio and Invitae share a vision that whole genome sequencing using PacBio HiFi reads in a routine clinical setting has the potential to fundamentally transform the genetic testing industry. Together, we are partnering to bring this vision to reality. Currently, Invitae processes hundreds of thousands of samples per year. We believe that there is a significant opportunity to move the majority of those samples to whole genome sequencing which is why we are working with Invitae to develop a new ultra-high throughput sequencer and workflow that is expected to be capable of operating at production scale. Under the agreement, Invitae will fund the development costs as well as provide input on scaled clinical workflows. The new system is expected to enable Invitae to sequence up to hundreds of thousands of samples every year in a medium-sized production facility. Upon completion of the new sequencer, PacBio will make the new system and associated consumables available to invite preferential pricing for a defined period of time. In addition, PacBio will have the ability to commercialize the new sequencer to other customers as well. Given the expected scale of the new system, we would expect labs involved with running production scale whole genome projects to be candidates for placement of the new system. Developing an ultra-high throughput sequencer is an important step in our strategy to move towards a broad portfolio of systems and capabilities that allow our customers to choose the right system for their needs and for their budget. The collaboration with Invitae is expected to run for five years. Over the first few years, we plan to develop the new sequencing platform and related workflows. We expect to rapidly hire more than 50 new people into our R&D organization, which will dramatically increase our R&D expense. While Invitae will be reimbursing us for these additional expenses, those reimbursement dollars may not be accounted for as an offset to these expenses. Susan will describe the accounting for the collaboration in more detail later in this call. As far as revenue is concerned, We do not expect any revenue contribution stemming from the direct collaboration for the next few years. However, once the new system is commercially available, we expect to see a very significant increase in revenue led by sales to Invitae. And before I get to our organizational updates, I'd like to share some customer highlights that really demonstrate the power and the potential of PacBio HiFi sequencing technology. First, We'd like to congratulate Dr. Dennis Lo and colleagues at the Chinese University of Hong Kong on the development of a new method for highly accurate simultaneous determination of DNA sequence and CPG methylation in one go, published in the PNAS Journal in January. This new method will help researchers explore the impact of epigenetic changes in humans and other organisms and has great potential in clinical research and eventually diagnostics in cancer and other disease areas where methylation changes are known to be important disease markers. We'd also like to congratulate the team at Hudson's Alpha Institute of Biology for their work in leveraging PacBio HiFi reads to help diagnose children with rare disease who still are lacking an answer after short read sequencing. Their recent paper published in Human Genetics and Genomics Advances demonstrates the power of HiFi sequencing to capture more of the variation across the genome, which gives investigators and clinicians more information to make a diagnosis, saving precious time and resources, and reducing the diagnostic odyssey. Shifting now to our organizational team, we are thrilled to have Mark Van Owen on board as our new Chief Operating Officer. Mark has deep experience in genomics and brings a strong voice of customer into our R&D and operations organizations. In addition, Mark will be responsible for leading our corporate development activities, which will become increasingly important as we expand. We are also excited to have Peter Frohman on board as our chief commercial officer. Peter has been at the forefront of population scale sequencing initiatives around the world, and his vision and ability to execute will move our commercial organization to new levels. In addition to Mark and Peter, we have also recently hired four additional commercial executives who will lead critical areas in product and strategic marketing, as well as commercial operations. As I've indicated on our last call, the key strategy for the company is to increase our direct sales force globally. We're making great progress in this area as we've hired over 10 new quota-carrying sales personnel over the past few months, which puts us well on our way toward more than doubling our sales force. We expect our new sales reps to come up to speed over the first few quarters after they come on board and then become part of the engine that drives consistent revenue growth. To summarize, I am very encouraged by our performance in the fourth quarter. For the second consecutive quarter, we met or exceeded our internal revenue targets. We have kick-started the new year with what promises to be a transformational collaboration with Invitae, and we have made significant progress in expanding our team to drive future growth. With that, I'll turn the call over to Susan, who will provide more details on our Q4 financial results and our current outlook for the first quarter. Susan?