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spk03: Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Biosciences of California, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Todd Friedman, Director of Investor Relations. Please go ahead.
spk09: Thank you. Good afternoon, and welcome to the Pacific Biosciences first quarter 2021 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the investor section at our website at www.pacb.com. or as furnished on the 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, and Mark Van Owen, Chief Operating Officer. Similar to last quarter, we are hosting our 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 will be making forward-looking statements, including providing predictions, estimates, plans, expectations, and other information. 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. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements. In addition, please note today's call is being recorded and will be available for audio replay on the investor section of 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'll now turn the call over to Christian.
spk07: Thank you, Todd, and good afternoon, everybody. Thanks for joining us today. I'll start today's call with an overview of our first quarter results and business highlights. Then Susan will provide some more detail on the financials and some thoughts regarding the second quarter. PacBio had the strongest first quarter in its history, delivering record quarterly product and services revenue of $29 million in the first quarter, an increase of 86% compared to the first quarter of last year. Revenue also grew 7% sequentially and exceeded our expectations. The strong quarter was driven in part by record SQL 2 and 2E placements as we delivered 41 new SQL 2 and 2E systems, growing our install base to 244 units as of March 31st. Our new placements included 10 SQL 2s and 31 SQL 2Es. Two quarters into the launch of the SQL 2E, we continue to be pleased with its reception. And through new purchases and instrument upgrades, about a third of the SQL 2 install base is now 2E. SQL 2Es reduced data footprint with its on-instrument data processing and cloud enablement, combined with our industry-leading HiFi sequencing, are enabling us to reach a broader customer base. In fact, roughly one quarter of SQL 2Es placed in the first quarter were new PacBio customers. These customers include a pharmaceutical company using the system for in-house development associated with an AAV gene therapy vector, and BioTools, our first SQL 2E service provider in Taiwan, who plans to use its SQL 2E for 16S metagenomics, among other applications. We also installed a SQL 2E at Queens University Belfast. the first PacBio instrument on the island of Ireland, where researchers expect to use highly accurate long reads in human whole genome and plant and animal genome research. Several multi-system installs also drove record sequel to quarter, as existing customers scale to address a diverse set of sequencing applications. For example, we installed multiple units at LabCorp to support its contract with the CDC to sequence positive SARS-CoV-2 cases in the U.S. In the first quarter, LabCorp represented about half of all CDC-related GSAID submissions. This led to COVID-19 surveillance-related revenue in the first quarter in the low single-digit millions. We are pleased with the Biden administration's recently announced plans to invest 1.7 billion into a national network to identify and track coronavirus mutations. Genomics will be at the heart of this endeavor, and these congressionally approved dollars will expand the government's genomic sequencing efforts while also creating critical research partnerships under a consortium called the Centers of Excellence in Genomic Epidemiology. We stand ready to support everyone involved in this critical work. We believe our technology is uniquely positioned to build a surveillance foundation to better prepare for future pathogen-related health crises. Our flexible and scalable protocols can be used not only on SARS-CoV-2, but for surveillance in influenza, HIV, HAIs, foodborne pathogens, community antibiotic resistance, and strain level identification of microbes in complex samples. Finally, with respect to COVID and consistent with our strategy to simplify our workflow for customers, we are developing a fully kitted product for COVID surveillance, which we expect will be available later this year. We intend to leverage the development of this kit to offer a suite of best-in-class solutions for infectious disease surveillance, as we believe this will be an important area for the company in the future. We also delivered a multi-system order of SQL 2Es at the Wellcome Sanger Institute in the first quarter related to the Darwin Tree of Life program. And Berry Genomics in China ordered several systems to expand its sequencing services including the launch of its Thalassemia Gene Atlas clinical trial program. Instrument revenue grew sequentially across all regions, with PacBio's HiFi accuracy driving a competitive tender win in the UK for neurological disease research, and we booked the first SQL 2 system in Italy at a new university core lab. Moving to consumables, first quarter revenue was $10.4 million, up 3% sequentially from the fourth quarter of 2020, up 25% compared to the first quarter of last year, and well ahead of our expectations. We were somewhat impacted by the Lunar New Year in February. However, the recent growth in system installs and robust utilization among service providers in China more than offset this impact. we saw increased utilization on the SQL 2 and 2E systems. In fact, utilization levels on the existing installed instruments were at record highs. In particular, APAC in China contributed to our greater than expected consumable quarter as service providers continued to work through a backlog of projects spanning human structural variation projects for rare and neurodegenerative diseases, plant and animal research, and metagenomics. We are proud to support these and other customers, like Discovery Life Sciences, who has started sequencing for the Gabriella Miller Kids First Pediatric Research Program, aiming to create a large-scale database of clinical and genetic data from patients with childhood cancers and congenital disabilities. Discovery Life Sciences also expects to start sequencing for the NIH's All of Us Research Program soon, with samples already in-house. As I've said on prior calls, one of our key strategies is to invest in our research and development pipeline to both accelerate our current programs and to develop the ability to take on more projects. During the quarter, we made significant progress in this area. For example, earlier this week, we released our latest HiFi protocol and software update. The newest product update enhances our leading long read chemistry with even more HiFi reads at or above 99.9% accuracy. Additionally, the new chemistry streamlines the sample prep process, allowing labs to scale to sequence hundreds to thousands of human genomes per year. Perhaps most importantly, this opens up hi-fi sequencing to more sample types, such as volume-limited blood, tissue, and cell lines, as we've been able to reduce the DNA input requirements by threefold. the broader and more flexible sample specifications can drive hi-fi sequencing into more projects and more applications. Turning to our collaboration with Invitae, the first quarter was a solid start to our multi-year development partnership. Work has already commenced developing the ultra-high throughput sequencer that we believe will deliver a highly accurate long-read genome at substantially below $1,000 per genome. I'm pleased to report that the teams are working extremely well together and have made substantial progress on aligning the key development milestones and product requirements. Meanwhile, utility for PacBio long read sequencing is already demonstrating success with our collaboration with Children's Mercy Kansas City, one of the nation's top pediatric medical centers. In the first quarter, Children's Mercy added four Sequel 2Bs to its fleet and increased their whole genome sequencing output to help improve solve rates for families and children living with undiagnosed rare diseases. Researchers at the hospital are already finding that HiFi sequencing demonstrates higher sensitivity and specificity than short read whole genome sequencing and can identify more rare variants per genome than other technologies. As we continue to invest in these clinical collaborations, researchers around the world are using PacBio sequencing to elucidate the genome and its relationship to human health and disease. For example, researchers at the University of Washington and the Mayo Clinic published studies using PacBio sequencing to discover and characterize complex pathogenic variants likely associated with ALS or Lou Gehrig's disease. Pi Phi sequencing deciphered these variants in highly repetitive regions of the genome, areas that cannot be accurately represented using other sequencing platforms. Also this month, researchers at Nationwide Children's and the Broad Institute published cases using PacBio sequencing to find pathogenic complex structural variants in childhood cancer and a rare genetic blood disease. In both cases, researchers explained the limitations short-read sequencing had in detecting these variants. Similarly, another recent study published in the Journal of Science used PacBio HiFi sequencing to assemble 64 haplotypes from 32 diverse human genomes and uncovered over 100,000 structural variants, in which over two-thirds went undiscovered by short-read sequencing. These studies clearly show the potential for HiFi sequencing in human genome applications. But our technology also remains critical in plant and animal research. Yesterday, Nature magazine released its special issue highlighting research papers from the Vertebrate Genome Project, a consortium targeting to complete reference genomes for all 70,000 known vertebrates. As the flagship paper outlines, These complete genomes are fundamental in applying genomics in biology, disease, and biodiversity conservation. Further, the authors confirm the use of long reads as essential for maximizing genome quality. The vertebrate genome project model is also inspiring other large-scale sequencing initiatives, including the Earth Biogenome Project, which aims to decode the genomes of all eukaryotic species within 10 years. And we're just beginning to scratch the surface of the potential applications that long reads can address. For example, a preprint study earlier this month showed the incredible performance and potential for PAC biosequencing in single cell genomics. Long reads, once thought to be off limits to single cell genome sequencing because of the throughput and input requirements, could eventually be a differentiated method in understanding complex genetic variation at the single cell level. Turning to our organizational updates, we made great progress in expanding our team. We added six quota carrying sales reps in the first quarter. In addition, we filled another six sales reps positions with second quarter start dates, including a general manager for EMEA and a country manager in Japan. Both of these leaders have deep experience in our space and will be instrumental in driving our expansion strategies in Europe and APAC. We are well on our way to doubling our number of sales reps in the field this year from the 22 reps that we had at the end of 2020. We also completed a marketing reorganization to better align our team to specific applications and champion the voice of customer into our product development process. We also announced Dr. Hannah Valentine as a director nominee for election to the board of directors at our annual meeting. Dr. Valentine will bring decades of experience as a professor of medicine at the Stanford University Medical Center and as the NIH chief officer for scientific workforce diversity. I look forward to the leadership and expertise she'll bring to our growing organization. Finally, while Dr. Mike Hunkepiller will not stand for reelection to the board of directors, he will continue to be an advisor to the board and an important partner for me as we continue to push our technology forward. I'd like to thank Mike for his contribution and his leadership over the past decade and his role in transforming long-read sequencing technology to where it is today. Now, I'll turn the call over to Susan to discuss the financials. Susan?
spk01: Thank you, Christian. As discussed, we achieved record revenue in the first quarter of 29 million, which represented an increase of 7% from 27.1 million in the fourth quarter of 2020, and an increase of 86% from 15.6 million in the first quarter of 2020. Intra revenue in the first quarter was 14.9 million, an increase of 10% sequentially from 13.6 million in the fourth quarter, and more than tripled the instrument revenue of $4 million recorded in the prior year quarter. We delivered 41 SQL 2 and SQL 2e systems during the first quarter, growing the install base to 244 systems as of March 31. Roughly three-quarters of these shipments were SQL 2e systems. We also had over a dozen customers upgrade to SQL 2E from SQL 2 in the first quarter representing approximately 500,000 in revenue. Turning to consumables, revenue of 10.4 million grew 3% sequentially from 10 million in the prior quarter and was up 25% from 8.3 million in the first quarter of last year. The growth in consumer revenue reflects increased utilization and our growing install base of SQL 2 and 2E systems. We also continue to be pleased with the increase in genomic data coming off of our sequencers as this underscores our customers' expansion of PathBio sequencing. In the first quarter alone, SQL 2 and 2E generated over 1.7 petabases, which is more than all the data generated from SQL and SQL 2 sequencers combined from 2015 through 2019. In particular, APAC and China's strength contributed to first quarter consumable revenue exceeding expectations. Service providers in the region continued to work through a backlog of projects, which resulted in record levels of system utilization, helping to offset the traditional softness from the Lunar New Year. Sequel 2 and 2E consumables represented approximately 82% of our total consumable shipments in the first quarter, with the rest from older systems. We continue to expect the proportion of consumer sales from SQL 2 systems to grow as the install base for these systems expands and customers migrate to our newest platforms. Annualized pull-through revenue per system on the SQL 2 install base in the first quarter exceeded 165,000, and there was minimal impact related to COVID-19 delays in the first quarter. Annualized pull-through revenue per system was down sequentially, as expected, due to consumable stocking orders from customers in Q4. Finally, service and other revenue grew to $3.7 million in the first quarter, compared to $3.5 million in the prior quarter and $3.3 million in the first quarter of 2020. Our service revenue growth reflects the growing install base of SQL 2E. Moving to gross profit, First quarter gross profit of 13 million represented a gross margin of 44.8% compared to gross profit of 11.4 million or 42.0% in the fourth quarter of 2020. The sequential increase in gross margin was primarily due to higher volumes which improved our factory utilization. Year over year, gross profit grew 5.5 million or 73% driven by the growth in revenue with gross margin approximately 3.2 points lower primarily due to a one-time benefit related to inventory reserve releases in Q1 2020 and higher stock-based compensation expense in COGS in the first quarter of this year. Moving on, operating expenses were in line with our expectations. Operating expenses in the first quarter of 2020 totaled $46.7 million, up 32% sequentially compared with $35.4 million in the fourth quarter and 16% higher than $40.2 million in the first quarter of the prior year. The increase in operating expense compared to the previous year and previous quarter was a result of increased R&D expense related to new product development and an increase in SG&A expense from the growth in our commercial team and higher non-cash stock-based compensation expense. As a reminder, the first quarter of 2020 included payment of a $6 million advisory fee incurred in conjunction with the termination of the merger agreement with Illumina. In terms of headcount, we ended the quarter with 435 employees, including 28 quota-carrying sales reps, and added headcount across R&D, marketing, and service and support functions. Non-cash stock-based compensation included in operating expenses with $9.2 million in the first quarter compared to $4.8 million in the prior quarter and $3.5 million in the first quarter of 2020. Other income and expense in the first quarter reflects a $52 million expense related to the repayment of continuation advances to Illumina due to our $900 million convertible note financing earlier in the quarter. Additionally, it includes a partial quarter interest expense associated with the convertible notes of approximately 1.8 million. First quarter net loss was therefore 87.4 million and net loss per share was 45 cents compared to net income of 74.9 million and net income per diluted share of 37 cents in the fourth quarter of 2020 and the net income of 1.3 million in the first quarter of 2020. As a reminder, net income in the fourth quarter of 2020 included a $98 million one-time gain associated with the reverse termination fee we received from Illumina. Net income in the first quarter of 2020 had a $34 million gain associated with the continuation advances received from Illumina. We don't expect to recognize any gains or losses related to the Illumina merger termination in the future. Now turning to our balance sheet, we ended the first quarter with $1.16 billion in unrestricted cash and investments, compared with $319 million at the end of 2020. The increase in cash and investments was primarily a function of the $900 million in gross proceeds from our sale of convertible notes to soft banks, and $22 million in proceeds from the issuance of common stocks through our equity compensation plan. Partially offset by the $52 million payment to Illumina, and 23 million cash used in operations. Inventory balances increased in the first quarter to 16.3 million, representing a 4.2 inventory term, compared with 14.2 million at the end of the fourth quarter of 2020, which also represented 4.2 inventory terms. Accounts receivable decreased in the first quarter of 12.9 million, reflecting a DSO of 46 days, compared with $16.8 million at the end of the fourth quarter of 2020, reflecting a DSO of 49 days. The decline in accounts receivable and improvement in DSO compared to the fourth quarter were primarily a function of improved revenue linearity. Moving to guidance. For the second quarter of 2021, we expect revenue to be approximately flat to modestly higher than $29 million reported in the first quarter of 2021. We expect gross margin to be roughly flat compared to the 44.8% reported in the first quarter of 2021. We expect operating expenses to grow sequentially to be in the low 50 million, representing a continued investment in R&D and commercial infrastructure. As a reminder, as part of the terms of our convertible notes, we expect to incur approximately 3.5 million in interest expense every quarter going forward until maturity, or conversion of the notes, which represents 1.5% interest per annum and amortization of debt issuance costs. Finally, our accounting treatment related to the Invitae collaboration will be recognized, as previously communicated, with funding from Invitae reported as a liability under deferred revenue. The liability may be amortized to revenue in later periods as we sell the developed product to Invitae per our agreement or released when other performance obligations are delivered or contingencies last. In the first quarter, we received approximately $4.1 million from Invitae related to our collaborations. We will record expenses associated with Invitae on our P&L as incurred, which we continue to expect to be between $20 and $25 million for the full year 2021. Expenses recognized in R&D related to our collaboration in the first quarter were approximately $1.1 million. With that, I will turn the call back to Christian. Christian?
spk07: Thank you, Susan. When I started as CEO back in September, I set forth three key strategies that I believe will drive growth at PacBio. The first core strategy is to expand our commercial footprint throughout the globe. This new footprint will help us reach more customers and help drive the benefits of HiFi sequencing into the community. Over the past several months, we've made substantial progress in this area, including the hiring of new commercial leadership and expansion of our sales force. We are well on our way to more than doubling our sales force, which is already helping us reach more customers than ever before. Second, it's essential that we expand our capabilities in product development so that we can build a multi-product portfolio that gives our customers flexibility on how they leverage the power of hotline sequencing. We're making strides in this area as well. We now have several programs in progress which are designed to improve the throughput of our sequencers, drive the cost of hi-fi sequencing down, and greatly simplify our end-to-end workflows. These advancements will make hi-fi more accessible than ever and will power our growth. Finally, we believe that whole genome sequencing will be an essential tool that clinical researchers will use to understand and treat disease. We expect that highly accurate, cost-effective HiFi reads will truly enable this market. As a result, a core strategy is to continue partnering with leading institutions such as Children's Mercy of Kansas City and Invitae to develop solutions that demonstrate the power of highly accurate long read sequencing using HiFi to enable this opportunity. In closing, we're off to a strong start for the year. During the quarter, we achieved record product and services revenue, expanded our gross margin, and I'm encouraged by the progress we've made against our core strategies that I've outlined. I want to thank our customers, employees, and partners for their support, and I look forward to updating you on our progress next quarter. With that, I'd like to open up the call to questions.
spk03: Thank you. As a reminder to ask a question, you would need to press star then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Kyle Mixon with Cantor Fitzgerald. Your line is now open.
spk08: Thanks. Hi, guys. Thanks for taking the questions, and congrats on this nice quarter here.
spk07: Thanks, Kyle.
spk08: Sure. I wanted to start with, I guess, like LabCorp. So I think I heard this right. Fifty percent of all DGs said yes. submissions in the first quarter. So would that kind of imply that you're thinking that the share from PacBio platform sequence COVID samples was close to that? Or, I mean, we just want to understand how to think about the share from PacBio in the last, you know, couple months. Can you help us kind of get to that number or at least some direction?
spk07: Sure. So right now LabCorp is using PacBio for all of their COVID surveillance sequencing. So that's, you know, so that's indicative of what LabCorp is doing is indicative of what we, our percentage. Of course, on a global basis, you know, we're still a small percentage of the total surveillance that's going on. But our share is increasing because sequencing in the U.S. is accelerating. And, you know, in fact, LabCorp plays a significant role in that. So we see the opportunity to continue to be growing for us. But, you know, as of March 31st, our data suggests half of the data in the U.S. was based on LabCorp, which is essentially ours.
spk08: Got it. And the 41 placements was impressive. And you called out a few, you know, lumpy, I guess, wins in the quarter. But could you just kind of speak a little bit more to, you know, what LabCorp represented, maybe what NBTA possibly represented, if at all? And then I guess Sanger's completed their installs in the quarter. But just any other, like, large multi-tool orders? You mentioned a few, but, you know, was it generally pretty, you know, was there any, like, huge orders or, you know, just, few there that had, um, you know, some lumps here or there.
spk07: Well, I think we highlighted, yeah, go ahead. Go ahead, Kyle. See, I want to add to that.
spk08: Just, yeah, just, sorry for that question. Just trying to think about the sustainability of this 41 number as we go to the second quarter and beyond.
spk07: Yeah, I think that's a good, uh, that's exactly, uh, the point. I think with respect to COVID, for example, LabCorp took several more systems. And so that revenue would be, um, you know, one-time infrastructure and wouldn't repeat in the second quarter. But we did have several multi-system, multi-unit system orders, you know, around the world. We highlighted LabCorp. We highlighted Sanger. I think there were some in Asia as well. And so I think our business, you know, we definitely have some multi-unit orders helping us in Q1, which helped the overperformance. And as we expand our sales force, that should help us cover the ones and twosies, but also continue to drive multi-unit orders into the future. And so it's kind of a balance from quarter to quarter as we grow here, how to think about system placements. But yes, you're right. We were very happy with the number for Q1. You know, I do think it shows that the SQL 2E was really an important launch for the company, and I think that, you know, the growth in SQL 2E placements is sustainable, and it's something we're shooting for.
spk08: Perfect. That's helpful. And the international, you know, orders and kind of wins this quarter were solid, and that's an area that PacPio wasn't as strong in the past, right? And so I'm just wondering if the recent expansion of the commercial team has paid any dividends thus far? I know it's pretty early yet. You've hired, you know, a few handfuls of reps, but has that benefit kind of taken shape just yet? And what are you kind of expecting, you know, a few quarters out from that team, internationally speaking?
spk07: Yeah, I think I don't know how much the actual new reps are really contributing, as we've talked about in the past. It takes a few quarters to get people up to speed. But what has happened is, particularly in Europe, we really have some great folks on the ground there. And now we're starting to see an acceleration. So we added reps, for example, in Germany. And our sales leader is based in the UK, and he's really driving business across Europe. across the region. So I think in the quarter, I was especially pleased with how EMEA really started coming together. And I think it'll only improve from there now that we have a very intense focus on the infrastructure and then adding the people. Asia continued to perform exceptionally well, as I said in my prepared remarks, how, you know, we're always worried about the Lunar New Year. and how that would slow business down. But the APAC team really helped the service providers keep their machines going and helping to drive demand there. And so we saw nice growth. We hired a country manager who started now in Japan. So that will start building out that Japanese infrastructure, which we basically have none. And so we're at the point where you're just starting to see the low hanging fruit and the opportunity. And my my belief is that as you get into the back half of the year, and we get, we continue to build this team, it will help us drive our growth.
spk08: That was great. Thanks. Thanks for the question. This one last question for me, I guess, regarding the plans for the sub $1,000 genome in the next five years, you mentioned that the plan is, I guess, in the works to kind of get through put up and cost down. But is there any specific range or threshold even that you kind of confidently think that payers will reimburse? And I ask this because a competitor announced about a month ago committed to reduce costs to what's called the $500 range or so for clinical customers. And obviously, you'd have to compete with that price point. I'm curious your thoughts around that dynamic.
spk07: Well, I mean, I do believe that price will be important to payers, but what will be more important will be value. And if we can come to market with a solution that provides more value, then I think we have a better chance at sustainability of price, whether that's at $500 or something slightly above $500. But I do think, as we've been saying for the last few quarters here, we believe our solution will drive us substantially below $1,000. And we believe that customers are willing to pay somewhat more for a more complete, more accurate genome, particularly when it's in a clinical setting and having a complete view is so critical to managing the outcome of a patient. And so, you know, I'm I'm actually very encouraged about the progress we're making on the R&D side to enable that promise. But I think structurally in the market, when we get these products to market, we will be very competitive, and I think it will be compelling.
spk08: Yeah, there seems to be a lot of enthusiasm hearing that this week at the rare disease event. I know you guys are hosting that. So I'll leave it there. Thanks for taking the questions, and congrats again.
spk07: Thanks, Kyle. Appreciate it.
spk03: Thank you. Our next question comes from the line of Doug Schinkel with Cowan. Your line is now open.
spk04: Hey, good afternoon. Thanks for taking my questions. So combining Q1 revenue with what you talked about directionally for the second quarter, it looks like you're targeting just under $60 million in first half revenue. You know, if we back that out of where consensus is for the year, It looks like you'd have to generate $75 million in the second half or so to get to the street numbers. Does that seem reasonable? I know you, at the beginning of the year, said you expected things to be more back-end loaded this year, but is that type of ramp acceptable in your mind? Does that make sense? And if so, what are the key drivers to kind of bridge that? I mean, some of that's going to be normalization of pull-through per instrument on a growing installed base, but I'm wondering... you know, specifically what you're expecting in that construct from things like surveillance testing as well as top-gen contributions.
spk07: Yeah, Doug, thanks for the question, and it's a good one. And I think, conceptually, if you do the math, you're exactly right, is my expectation is that the back half is stronger than the front half with respect to the ability to grow. And why do I feel that way? I think, first and foremost, is lead generation activities that are going on now are at all-time records for the company. And so, you know, we have put a pretty intense focus on, and on these earnings calls, we talk a lot about the sales reps, but we've also invested a lot in, since I started back in September, on formalizing and improving our processes for lead generation and defining how to reach out and communicate with customers. And so there's so much more to a sale than just the sales rep being out there. And so what's encouraging to me is I see that we're achieving record levels of lead generation or very significant numbers of leads coming in. And the objective, of course, is to get those through the funnel and out and executed on. areas where I think we will see growth. I do think surveillance will continue to be an opportunity for us. And as you heard on my prepared remarks, we're going to develop a kit for COVID, which I think is a really big deal for the company because historically the company hasn't developed kitted applications. And so, you know, as part of our strategic planning and thinking, we have thought carefully about, okay, we believe, you know, we believe viral surveillance or pathogen surveillance will be a market for us long into the future. So let's start by getting a COVID kit out there and develop that core competency so that we can leverage that capability over not just this year, but next year and into the future. And so I know that's not exactly on your guidance number, so to speak, but those are all important components of how we drive into the market. The other piece is, you know, I do think there are significant opportunities in Europe. I mean, as you heard, we just shipped our first system ever into Italy. Just to put it in perspective, now, Italy is not the biggest country in Europe, but it just shows you how early we are in our commercial ramp relative to our peers. And so, you know, as we build out and structure these territories and drive the discipline of our commercial operation, you know, that will help us accelerate pushing things across the goal line sooner, and I think will help drive our growth.
spk01: Hey Doug, I just wanted to add a couple comments to relate to what Christian was saying. So I think one of the things that we saw in Q1, which was great for us, was the interest of customers in the SQL 2E, as Christian had mentioned. And then we also had some high profile multi-instrument orders. from customers, and I expect to see some of that throughout the rest of the year. The timing of which quarter to quarter can vary, but we do have a good pipeline of multi-instrument orders from customers, so that's very promising. The one thing that you have to keep in mind is we are ramping and investing in the commercial organization. It usually takes up to two quarters for a sales rep to become productive, and then there's still the time to close orders as well. Within some of our markets, it can take longer to close an order, so anywhere from six months to even 18 months. And so that also needs to flow through. We're investing, as Christian mentioned, we're investing in marketing. We're generating more leads. And so we're certainly building the infrastructure to accelerate growth over the long term. But quarter to quarter, there is some variability, and exactly what that looks like within 2021 is still a little bit variable, and it's a reason we didn't give guidance for 2021.
spk04: Okay, understood. Susan, just one very quick follow-up on part of what you described. I know, I think at least in partial response to the last question, You talked about a few multi-order placements in the quarter. Is that why the ASP was a little bit lower for the instruments relative to the second half of last year? And if so, is the expectation that the ASP for instrument normalizes back to second half of the year levels as we look ahead over the balance of the year?
spk01: Yeah, that's a very good question, Doug. So volume and ASPs are certainly what impacts our gross margins. And as you had noted, sometimes when we have multi-instrument orders from customers, the average ASP for that quarter can be slightly below our total average on a run rate basis. But as I had mentioned earlier, we still anticipate that we're going to have more multi-instrument orders. So that's going to be probably the highest variability quarter to quarter in terms of average ASP. So do I think that Q1 was all the multi-intrusion orders in the year? No. We're going to see more in 2021.
spk07: Okay. Yeah, but Doug, at the end of the day, yeah, Doug, at the end of the day, we, you know, I do think ASPs will fluctuate a little from quarter to quarter. And we're probably somewhere between where we were in Q1 and where we were in the back half of last year. You know, the strategy here, right, is to drive the install base. And either that's through multi-unit orders or singletons. And the reason why that's so critical, of course, is to get everyone running consumables, but also really pushing hi-fi chemistry so that we develop new applications. And so it's part of a broader strategy on how to not only to grow the top line, but to grow the application capability and create that snowball effect over the next several years. So that, that's how to think about it, I think.
spk04: Yeah, no, totally. And I apologize for stepping on you there a little bit, Christian, but I was going to kind of say the same thing that if, if, uh, If you've got to make a slight trade-off on ASP in exchange for more multi-unit placements and getting more instruments out there, that's more than an acceptable trade-off, I would think. Maybe the last one before I hand it off to others. As you mentioned earlier on this call and was kind of a point of emphasis on the last quarterly call, you have well over a billion dollars in cash on the balance sheet. A lot of that came in from SoftBank via their $900 million investment. And that was positioned to really accelerate growth initiatives for the company, the investment. And of course, having a strong balance sheet puts you in a good position to be a little bit more nimble and maybe a lot more aggressive. Is there anything more you can share at this point on strategic priorities and timelines, reasonable timelines, with wide error bars, of course? on where we may hear more from you on what, you know, essentially the follow through on the cash you've raised.
spk07: Yeah, no, that's a good question, Doug. I think, so right now, what we've done, you know, in the very short term, right, is number one, we've accelerated even further our commercial initiatives for 21. And that means pulling all of the hiring forward, That means starting to really seriously evaluate real infrastructure in Europe. So we have no facilities, we have no warehouse space or anything like that in Europe right now. And the truth is, if you want to really grow in Europe, you need to look European and you need to be able to have local warehousing and local application labs and things like that where you can get much closer to your customers. And so, you know, the first thing is kind of the blocking and tackling associated with some of that expansion. And we'll use some of that capital this year on that. Now, those are reasons, you know, relative to the billion dollars, of course, that's small. The second is... is focusing on driving the R&D portfolio. Now, we've been fortunate that the arrangement we set up with Invitae, they are paying for most of the development on the new platform for them. So, you know, but we are accelerating spend around the edges, particularly around the workflow. So we're very focused on sample prep and trying to create end-to-end solutions and create the ecosystem that's really going to drive growth over the next five years. So then the last part, of course, which is the part you're probably most interested in, is kind of looking at external opportunities and whether that's whether that's collaborations or partnerships or acquisitions. And we are evaluating lots of different opportunities. As I've said before, I think they come into two different camps. You know, the first camp is kind of horizontal in the sense of thinking about, are there assets out there that we can acquire or collaborate or partner with to fundamentally give us competitive advantage or create growth opportunities in the front end. And I think that we're knee-deep in evaluating lots of those different kinds of opportunities. And then also the other side of horizontal, of course, is are there informatic opportunities? You know, in the past, we've been very successful at integrating informatic-type opportunities to kind of round out the product portfolio. And there's adjacencies and that we're looking very carefully at, are there, you know, our objective is to be the world's most advanced, you know, solutions company for biology. Like that's really where we're going way beyond just long read sequencing. And I think there are opportunities out there in the market, but we also have to be patient and we have to focus on how do we build our, How do we make sure that we execute exceptionally well on our core business? We've basically built out our executive team now, and so now we can start evaluating some of these things. Timing is impossible to predict because you can have a vision, but there's lots of different factors in the way. And so I guess the one thing I'll leave you with, Doug, is that we are looking at a lot of different opportunities. but we're going to be patient, and we're going to make sure that we do the right thing, if that helps.
spk04: That is fantastic. Thank you for all that detail, and I really appreciate all the airtime and help. Have a good night.
spk07: Thanks, Doug.
spk03: Good to talk to you. Thank you. Our next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is now open.
spk05: With surveillance, low single digit millions in the first quarter, how do you think about the run rate over the next couple quarters there? And then, you know, Christian, you've flagged the 1.7 billion national surveillance, you know, funding that Biden set aside, I think they're going to build six centers of excellence. How do you feel like your position is that gets up and running?
spk07: I think, Tycho, it's good to talk to you. I think our run rate with respect to surveillance, we definitely had some infrastructure build in the first quarter, but I think that can be offset with other infrastructure builds as you get into the year and we acquire some other customers, et cetera. So my expectation is it is kind of in that low single-digit kind of number right now as we see it. I think that, you know, there's no question that our solution is very compelling and we are getting good traction, particularly with LabCorp, of course. And so as these centers of excellence start to form up, I think we have opportunities to be part of the solution there. You know, there's also the reality is that we are still the emerging fish in the pond, so to speak. And I think that, you know, we have to demonstrate consistently that our solutions are, you know, not only better than our competitors, but more economically viable. And I think we can do that. The other thing is, Taika, we've been building, you know, we just recently hired, for example, a vice president focused in government affairs. And we didn't have that capability before. And so now we have, you know, now we have much greater access to government entities and areas. And I think that will help us in the dialogue and discussion. So I think we will have a seat at the table. And I do think it's a real opportunity for us.
spk05: And on economically viable, you mentioned surveillance of influenza, HAIs, food pathogens, some of these other markets. I mean, are we at a price point now where you think it can be cost competitive to PCR?
spk07: I believe we can be, yes. I mean, I do think we have to demonstrate end-to-end solutions and protocols, but I think the bones are in place. And as we develop kitted products and show that we can do that, not only can we be, you know, cost-competitive, but it's also a big revenue opportunity. Because today, when you think about the COVID opportunity for us without a kitted product, you know, we're really just capturing the sequencing portion of the opportunity, which, as you know, is quite small relative to the total dollars associated with prepping the sample prep and the other pieces.
spk00: You also – oh, go ahead. Thank you, Iz. know right now the sequencing isn't isn't you know the big value driver it's it's it's the kit um and it's you know there's both the supply constraints right now on the oligos which we need to overcome by kidding it but there's also the value that you get in that complete kit and so so i think it can be competitive against those other approaches because the sequencing isn't the barrier for us right now or the cost of the sequencing isn't the barrier
spk05: Okay, that's helpful. You mentioned the new HIFI protocol, reducing sample input requirements by 3x. How meaningful is that? And do you think that opens up new markets, new opportunities? I mean, you find blood, but I'm just curious what you actually think that means in terms of real-world adoption.
spk07: Yeah, Mark, why don't you take that one?
spk00: Yeah, I don't know how much attention it's received, Tycho, but I'm glad you pointed it out. So, first off, I will say that the team is focused on delivering advancements now across all of the portfolio from sample prep through downstream analysis. And, you know, this hi-fi sequencing and software releases is, I think, just a great example of the focus. You know, the reduction in input was from 15 micrograms down to 5 micrograms. Now, with 5 micrograms, I do see us getting into more sample types now. So, you know, beyond blood, but getting the tissue biopsies and cell lines. And so, accessibility and lower input applications have been a challenge for us. But I think it's also, you know, the speed of it, of this new polymerase does help with accuracy. And so, again, it further pushes the number of hi-fi reads that are at or above that 99.9% accuracy for whole genome sequencing. The workflow, I think, is going to help us get this into more hands. It's a much simpler workflow and and we worked with Children's Mercy to make sure it was automation-friendly as well. And some of the other things that, you know, you don't even really think through is, you know, some of the adaptive loading opportunities we've built in this. And so now you can reduce overloading of smart cells just actively monitoring the polymerase that are binding to the bottom of the ZMWs. So we can really help customers load and get the most out of their chip. So, you know, again, I think it's a great example of what we can do, and being down to five micrograms will enable more of these tissue types or sample types to be used.
spk05: Okay, that's helpful. POPSEC, I think Doug had mentioned it in one of his questions. You know, we did hear from Aluna the other day about some newer programs, Egypt and Japan, that are kind of coming to the surface. Can you just talk a little bit about whether you're in the mix on some of these newer POPSEC programs and, you know, how you think about the long-league component to the extent there are newer initiatives getting off the ground?
spk07: Yeah, I think as, as you know, some of our team has a lot of experience in, in pop seeking and I, and it's helping us kind of position the company such that we can get portions of these projects. Now the reality is, is that, uh, you know, our, our platform to, to get majority share of a, of a project is, is probably not a reasonable at this point in time, but getting, you know, getting a small percentage of the samples, kind of like with the All of Us program, for example, right? We're sequencing a small fraction of the total, but it's meaningful for us as the long read, and it's meaningful because it also puts HiFi front and center in terms of being the highest performing, you know, chemistry for sequencing, and it sets us up as we launch new platforms And so we are, you know, we are seeing most of the same opportunities as our friends. But, you know, our expectation is we capture, you know, smaller portions of those types of programs. And, you know, the one in Japan you talk about, I mean, the reality is we didn't have any infrastructure over there and we're just starting that build out. So I don't know how much access, you know, we will add to that particular program specifically.
spk05: Okay. And then last one for Susan, just I want to go back to kind of the 2Q guidance for a minute. If I go back to last quarter, you'd actually got it, you know, for the first quarter to be down slightly and you're up seven. So, you know, you had the kind of benefit of the multi-system orders. Just so we're clear, the reason why the 2Q guidance would be flat is because just the timing of some of the system orders or is there another kind of component that's kind of weighing on the outlook?
spk01: Well, I think there was a lot of strength in Q1, and so, you know, we talked about the multi-intern order, but also I will reiterate from our call, we also benefited from backlog of projects that had been slowed down because of COVID in 2020, and it started to ramp in Q4, and it was even stronger in Q1, such that we had the highest utilization on our install base. So Consul Revenue also helped us in Q1 as well. So looking forward, that's the largest reason for the flat to modestly higher in Q2.
spk06: Okay. Thank you.
spk03: Thank you. Our next question comes from a line of with Morgan Stanley. Your line is now open.
spk02: Hey, guys. Good evening. So first on the quarter, Christian, just a couple of quick cleanup questions here. Can you quantify, you know, what the impact was on consumables from the Lunar New Year just to give us a sense for what the true underlying consumable spend was here? And then, Susan, to the remarks you just made on the consumable side on backlog projects and catch-up, Is there a catch-up element that you saw in the first quarter as some of these labs opened up and travel restrictions eased up and you could just install those units which, you know, essentially you committed to in 4Q itself?
spk07: So I'll start. You know, Tejas, I don't have the exact numbers. Like, it's very difficult to quantify exactly numbers. a Lunar New Year effect because it's really just a couple of weeks and you start to question whether or not, you know, whether or not they make it back up during the quarter. I think what we were trying to emphasize is, you know, Lunar New Year was typical, but the demand from our service providers chewing through some of their backlog and also the basic expansion is more than offset that and actually looking forward Some of those same service providers have very substantial backlogs still. And so, you know, my expectation is they're going to be running pretty significantly for most of the year, probably.
spk02: Got it. Okay. Um, and then one, one of the consumables line, um, you know, should be, is it, is it started with essentially assume one 65,000 as, as, as the new floor and the pull through on the sequel? Um, I mean, it sounds like, you know, even in three Q last year, you were around 160 K. So, um, you've, it should only sort of increase from that level in, in the quarters and, and, and perhaps even the years to come.
spk07: I think it's going to bounce around to be honest with you. Um, And the reason why I think it's going to bounce around is, you know, we expect to place a lot of systems. And, you know, you saw we had 41 in the quarter. So that will go into the denominator, you know, as we do the calculations for this quarter. And the, you know, it takes time. The multi-system units to existing customers, those will probably ramp up reasonably quickly. But for new customers, you know, we said we have a lot of new customers in the quarter. It might take three or four months for them to start ramping up to whatever normalized utilization that we can expect from them. And so I think my – at least from my perspective, I think the number is going to bounce around a little bit. But, you know, kind of in that 160 to 200, you know, range isn't – It seems like a pretty reasonable way to be thinking about it, but it will be dependent every quarter on the denominator as much as the numerator. You know, the one thing I would point out that Susan pointed out in her remarks was we had record utilization of systems and I want to be very clear, you know, when we calculate pull through, that's just a number of, you know, revenue and systems installed. When we talk about utilization, we have software and capability to monitor the vast majority of our install base and see, you know, how often they're running smart cells and how they're actually, and so we look at that very carefully. because it's an early warning system to figure out, hey, we should make sure we call that customer to place a reorder or, wow, they're really, something's changed, they must be doing a new project or something. And what we had in the quarter was records across the board, and that's actually really exciting. It means people are using their systems, they're getting great data, and I think it bodes well for the future.
spk02: Got it. And then one on the NVIDIA collaboration, Christian, now that it's been a couple of months, I mean, and you mentioned to the teams working closely together, what are your incremental learnings, particularly in terms of, you know, the technical feasibility challenges that you need to address here? And then as you work towards that sort of sub-1K price point that you mentioned, right? And then Also, in terms of the milestones that we should be really sort of hanging our hats on to track progress, you know, before Invitae gets access to that first unit in-house, is there anything that you sort of intend to share along the way that will help us kind of like just measure progress there?
spk07: You know, I'm going to ask Mark to talk about the progress of Invitae because he is – He is this project sponsor internally, and he's very close to it. But with respect to milestones, as we reach reasonable technical milestones, so for example, probably early sequencing data, things like that, I suspect we will want to share some of that. But we haven't defined you know, explicitly for investors, what those milestones are. We're very focused on, you know, serving our customer and VK, but Mark, why don't you, uh, why don't you give a little color on, on, you know, the project, the progress of the project.
spk00: Yeah. Happy to Christian. Um, so obviously, you know, we just announced this in the middle of January, but, um, I, I, I was happy to see how quickly we jumped on this together. And so, so the teams did start working together right away. And as a reminder, a lot of this, or almost all of this, is leveraging the core technologies and HiFi sequencing that are already in market or were already in development. So I don't see this as major miracles required. It's scaling and hardening the development of this. We have been meeting with Invitae regularly across a number of work streams, and this is an entire workflow to meet production whole genome sequencing needs. And so while we're building and scaling the sequencing technology, we're learning a lot about their front end, how they do their DNA extraction, how they do their library prep automation to ensure that together we're going to go and build a front end that's going to get the DNA and great DNA under the new sequence we're building. I would say we've also learned a whole bunch about the overall software informatics that a production lab needs and what Invitae is using to make sure we have seamless integration into their lab and their interpretation engine and future reporting capabilities. So I would say, you know, the work streams across all of these different fronts are really going well. And, you know, I don't expect us to deliver a great product to Invitae with this, but this is going to harden the complete whole genome workflow for us to take and broadly commercialize. In terms of milestones, you know, Chris and I will have to noodle on what we want to share along the way. But just, you know, a reminder, this is leveraging core technologies, and it's a multi-year project.
spk02: Got it. Very helpful, Mark. Thanks, guys. Appreciate the time.
spk03: Thank you. Thank you. Our final question comes from the line of Stephen Ma with Piper Sandler. Your line is now open.
spk06: Great. Thanks for the questions, and congrats on the quarter. Thank you. So two quick ones on clinical. Could you update us on the partnership with Berry Genomics to get China FDA approval for SQL 2?
spk07: You know, Barry continues to work diligently, and we're working with them. And, you know, from my perspective, the project is still on track. And so, you know, that will be our first foray into clinical anywhere in the world. And, you know, the team at Barry is doing a great job of getting our system ready. We have an internal team that's helping, assisting with the project as well, so. Yeah, I think it's going pretty well.
spk06: Okay, great. And then the second part was, I know you said that you would continue to partner on the clinical side, but given that early on, based on some of your comments, it looks like some long read hi-fi sequencing seems to be unlocking new clinical applications. So given that, any plans to develop your own clinical programs, given the balance sheet cash flexibility?
spk07: At this point, as part of our core strategy, we really believe we need to work with others and really enable our customers and be the preferred partner. We think that's a strategy that will endear us to many more customers. than otherwise. And so right now, no, our real focus is on how do we do these partnerships and collaborations. That being said, we may have to develop some deeper capabilities, for example, with cleared instruments and potentially cleared kits because our customers may demand that. At this point in our strategy, that's not a core focus. The core focus really is collaborating, leveraging others' core competencies while we build out our core competencies in executing on the core business, if that makes sense.
spk06: Yep, that makes sense.
spk00: And the last one from... You know what? We've obviously... Go ahead, Mark. We've obviously spoken a lot now about Invitae and also Dairy Genomics, but You know, I would just, you know, also still just highlight groups like Children's Mercy, you know, for rare disease and how we can partner there to improve our clinical capabilities. But even a surgeon, you know, I think what they're doing with carrier screening and long reads is also another great example of a clinical partnership approach to getting some long read products into market.
spk06: Yeah. Yep. I appreciate the comment. Yep. And the last one to me, I know we're way over time. So speaking about Children's Mercy Kansas City, It looks like the new Hi5 software release was developed in collaboration with them. Did you guys leverage Children's Mercy's existing database of rare variants or other expertise there? And if so, is there any shared IP with Children's Mercy?
spk07: Yeah, it's not – it's really more of a core technology, so it's not – it's more, you know, how the software actually – you know, how the software actually runs and It's not so much trying to create shared IP on variants, for example. It's really more leveraging their expertise to make sure we create the best product we can for all of our customers.
spk06: Okay, great. Thanks. Appreciate it. Thank you.
spk03: Yep, thank you. Thank you. This concludes today's question and answer session. I will now turn the call over to Todd Friedman for closing remarks.
spk09: Thank you all. As a reminder, a replay of this call will be available on our website in the investor relations section, as well as through the dial-in instructions contained in today's earnings release. Thank you for joining the call today. This concludes our call, and we look forward to updating you on our progress in the second quarter.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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