Pacific Biosciences of California, Inc.

Good day, everyone, and thank you for standing by. Welcome to the Pacific Biosciences of California Incorporated third quarter to 2021 earnings conference call. At this time, all participants are in a listen-only mode. And 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 1 on your telephone. And if you require any further assistance, please press star 0. I would now like to hand the conference over to the Director of Investor Relations, Mr. Todd Friedman. Please, go ahead, sir.

Good afternoon, and welcome to PACBio's third 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 of our website at www.pacb.com, or alternatively at furnished.com. on Form 8K available on the Securities and Exchange Commission website at www.sdc.gov. With me today are Christian Henry, President and Chief Executive Officer, Susan Kim, Chief Financial Officer, and Mark Van Owen, Chief Operating Officer. 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 that 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.

Thank you, Todd, and good afternoon, everybody. Thanks for joining us. On today's call, I will start with a brief update on our strong third quarter performance. Next, I will discuss the progress we are making in some of our target markets. And finally, I'll share how both PacBio and the research community, more broadly, are innovating to further drive the utility of HiFi sequencing. Then Susan will discuss our financial results and full year guidance. Q3 marked another successful quarter as we continued to make solid progress against our strategic initiatives. We achieved another all-time record for revenue in the third quarter, with product and services revenue of $34.9 million, an 83% increase compared to the third quarter of last year, and a 14% increase over the second quarter of this year. We installed 44 SQL 2 and 2E systems, which is also an all-time quarterly high and brings our total installed base to 326 units, almost double the installed base we had at the end of the third quarter last year. SQL 2 and 2E is now the most installed PacBio sequencer in the history of our company, and we are on pace to break our record for the most sequencers placed in a single year. Nine of our system orders were new to PacBio instrument customers from across all regions. This is encouraging as it demonstrates our investment in developing a world-class commercial organization is enabling us to reach more customers than ever before. As of the end of the quarter, we have doubled our quota-carrying sales team, achieving that goal a quarter ahead of our plan. Additionally, the product enhancements that we've made over the past year are providing more value to our customers, which is driving adoption of our platform. Over the past year, we've been working to develop tools to help us understand our growth in specific target markets, and today, we're pleased to provide some insight into the revenue contribution from these key markets. We will provide this information aperiodically. Additionally, please note that the size and relative growth rates are approximate and intended to be used as directional in nature. First, the human germline market is our largest and fastest growing and contributes just over one-third of our total revenue year-to-date. Included in this market are translational research customers focused on areas like rare and inherited disease, carrier screening, pharmacogenomics, and HLA, as well as population genomics and other research initiatives. Human Germline includes customers like Children's Mercy Research Institute, which is showing signs of success using PacBio HiFi in the Genomic Answers for Kids program. Recent findings from the institute help substantiate the use case for accurate long-read sequencing in the clinical research setting. The program has completed over 600 HIFI genomes to date and uncovered multiple diagnostic findings attributed to disease, including structural variants, single nucleotide variants, and repeat expansion disorders that were not found with previous sequencing methods. HiFi WGS uncovered over four times more rare coding structural variants than short read WGS and found variants in genes of unknown significance in over half of the undiagnosed cases. These genes or variants may prove one day to be pathogenic and provide insight into unanswered questions today. Outside of rare and inherited disease, customers in our human germline focus include Prenetics, a leading genetics and diagnostic health testing company, and a new instrument customer in Q3 that installed the Sequel 2e to further differentiate its carrier screening test outside the United States. It also includes existing PacBio customers like Berry Genomics. Berry announced last week they received NMPA approval for the Sequel 2, which they will brand as the SQL 2 CNDX in China as a clinically qualified system. This approval is an important step for them to submit data for clinical trials, and it's planned for selling the SQL 2 directly to hospitals. This milestone also marks the first regulatory body to approve a PAC bio instrument. Other programs in our human germline category include the Human Pan Genome Reference Project, which uses PacBio sequencing to build a more diverse representative reference genome. The project has already been made available over 40 reference quality human genomes to researchers around the globe and expects to complete hundreds more. Moving on, the plant and animal market, with the myriad of diverse and complex genomes, continues to be a main staple for highly accurate long-range sequencing, and year to date, represents just under one-third of our revenue. This category includes initiatives like the European Reference Genome Atlas, which is leveraging PacBio HiFi sequencing to help generate reference quality, complete and error-free genome assemblies towards its goal to ultimately assemble at least 200,000 plant and animal species across Europe. It also includes customers like the USDA, which installed multiple SQL 2Es in the third quarter, utilizing their remaining year-end budget. We're encouraged by the USDA's progress towards its five-year science blueprint and its goal to use WGS to tap into genetic diversity and use genomic technologies to accelerate breeding progress, decrease susceptibility to climate change, pests, and diseases, and increase yield potential. Next. Roughly 20% of our business comes from infectious disease and microbiology applications, which includes customers like Drexel University, who installed its SQL 2E to address its needs for COVID-19 research today, and to have a pathogen surveillance solution on hand that prepares them for the next emerging threat, like respiratory infections. Also related to infectious disease and microbiology, Nkaba Biotech, our African distributor, has partnered with the African Center of Excellence for Genomics and Infectious Disease to place the first SQL 2e in West Africa. Professor Christian Hoppe will implement HiFi sequencing at the center to fill the gaps from other short and long read technologies and to help provide a more complete genetic picture of viruses and microorganisms. Finally, just about 10% of our revenue today comes from oncology and emerging applications. While still nascent today, long-read sequencing has been demonstrated as a useful tool in emerging applications like gene therapy, CRISPR, and synthetic biology, and we see a growing list of publications and studies supporting the use of PAC biotechnology in these areas. What's exciting to me is that as we reach more customers, we expect to see important new applications of long-read sequencing emerge, which will further catalyze our growth. Finally, we expect the addition of a short-read sequencing platform to drive growth in oncology applications upon its launch. One of our core strategies to accelerate the adoption of HiFi sequencing has been to develop end-to-end kitted solutions to make PacBio sequencing accessible to more labs and to simplify customer workflows. One of these kitted solutions includes our HiFi viral kit for COVID-19, which we expect to launch in the coming weeks. HiFi Viral allows customers to scale genomic surveillance testing quickly and efficiently with an accurate and robust solution to capture all variants, including novel mutations. In our view, it also offers a simpler kit than protocols from other providers with fewer reagents and less pipetting at a very competitive price. The University of Louisville, for example, explained that their early access use of HiFi viral allowed them to reduce hands-on time by 80% while improving mutation detection compared to PCR amplicon approaches used by other sequencing technologies. We are extremely proud of this assay design. Our team developed a robust product with redundancy and capture design, allowing HiFi viral to catch emerging variants and we've already seen it identify novel variants missed due to the other assays' fixed designs. We look forward to sharing more when we officially launch the kit in the next few weeks. Beyond HiFiViral, we plan to also release an updated end-to-end microbial genome assembly application on the Sequel 2e system. This update doubles the current multiplexing capacity while continuing to deliver the industry's leading standard for reference quality microbial genomes. Together, these two releases provide public health and microbial research labs with a powerful menu of applications to service a broad range of use cases on their SQL2E platform. With this exciting set of improvements for WGS, we're continuing to build on PacBio's unique ability to simultaneously detect not only the genomic information, but also the epigenetic signature. We're expecting to bring an updated and vastly improved version of this feature to the SQL 2 and 2E platforms early next year, and have received immense interest in this feature at ASHG last month. Customers are already talking about seamlessly adding methylation to their PacBio sequencing runs to bolster their research. As you can see, we're committed to making HiFi sequencing not only the highest quality, but also the easiest to use and the most complete data type available. With the addition of circulomics in the third quarter, we are already beginning to see progress in simplifying and improving the long read sample prep. This past quarter, the team collaborated with the Coryell Institute for Medical Research to develop a high molecular weight DNA reference product based on its NIGMS and NHGRI cell repositories, which are among the most widely used repositories in genomics research. Coriel's adoption of Nanobind is a testament to the superior quality of the technology and the growing demand for long read sequencing, which often requires high molecular weight DNA. We are pleased to have a solution in-house that addresses this important part of the long read sequencing workflow, and we're fully committed to supporting customers on any platform. In the backdrop of all these improvements, we're pleased to see data published in September from the Association of Biomolecular Resource Facilities that compares major commercial short and long read sequencing technologies, which affirms PacBio as a leader in accurate and complete sequencing. Specifically, the publication shows that circular consensus reads, or HiFi reads, have the lowest error rate of all technologies and the highest mapping rate and the highest precision in calling variants in clinically relevant regions. And there's still headroom to make HiFi more accurate as the scientific community keeps pushing their boundaries. The genomics team at Google Health, for example, shared a feasibility study on their deep consensus tool that builds on PacBio software to produce even more accurate HiFi reads. According to the preprint, the software reduced read-level errors by 42% and increased total HiFi yield by approximately 9%. The tool also increased the yield of Q30 and Q40 reads. Similarly, the PacBio team collaborated with bioinformaticians at NVIDIA in a study to train deep learning models to polish HiFi reads and reduce errors by 25 to 40%. As you can see, sequencing accuracy is a north star and we'll continue to invest in raising the bar. Improved accuracy has the potential to translate into more clinically relevant genomic discoveries, more complete and better reference-grade genome assemblies, both human and non-human, and higher sensitivity to novel mutations in viruses and bacteria. As we expand our install base and get HiFi sequencing into more customers' hands, it creates an environment where researchers can push the boundaries of SQL 2 and its addressable applications. The Broad Institute, for example, recently published their Moz IsoSeq protocol, which has the potential to transform the way single-cell and RNA-Seq are performed. According to the Broad, this new protocol achieved up to 22 times improvement in throughput, generating up to 40 million isoform reads per 8m smart cell, and is fully compatible with most protocols that generate full-length cDNA, including existing 10x genomic single-cell cDNA libraries. Not only is this a breakthrough in the amount of single cell data obtainable in a SQL 2 run, but deciphering full length isoforms is something currently unattainable on short read single cell sequencing or site seek. This is especially important as there are unique isoforms associated with specific cell types relevant to cancer and disease. Finally, a month and a half after we completed our acquisition of Omnium, I'm pleased to report our development timelines remain on track globally to launch the first platform using the Omnium technology in the first half of 2023. Our combined R&D teams are making solid advancements, leveraging each other's expertise. We have seen an increase in the number of invention disclosures submitted, including dozens of new disclosures leveraging the synergies between the company's technologies. With that, I'll turn the call over to Susan to discuss our financial results. Susan?

Thank you, Christian. As discussed, we are pleased to report another record revenue quarter in the third quarter of 2021, with $34.9 million in product and service revenue, which represented an increase of 14% from $30.6 million in the second quarter of 2021, and an increase of 83% from $19.1 million in the third quarter of 2020. Instrument revenue in the third quarter was $15.9 million, an increase of 12% sequentially from $14.3 million in the second quarter, and a 106% increase from $7.7 million recorded in the prior year quarter. We delivered 44 SQL 2 and 2E systems during the third quarter, growing the install base to 326 systems as of September 30. Turning to consumables, Revenue of $14.6 million in the third quarter grew 19% sequentially from $12.2 million in the prior quarter and was up 82% from $8.0 million in the third quarter of last year. The growth in consumable revenue reflects increased smart cell usage as a result of our growing install base of SQL 2 and 2E systems and increased average utilization for instruments. SQL 2 and 2E consumables represented approximately 85% of our total consumable shipments in the third quarter, with the rest from older systems and other consumables. Annualized pull-through per system on the SQL 2 and 2E install base in the third quarter remained relatively strong at approximately 175,000. We continue to observe increasing utilization from customers connected to our SmartFleet network, further evidence that customers are sequencing on PacBio more than ever. Finally, service and other revenue grew to $4.4 million in the third quarter compared to $4.1 million in the prior quarter and $3.4 million in the third quarter of 2020. Our service revenue growth reflects the growing install basis equal to and to ease. Shifting to a regional view, America's revenue of $19.4 million more than doubled from the third quarter of last year. Of note in the third quarter, we installed the first SQL 2 unit in South America. Moving to Asia Pacific, revenue of $9.2 million grew 58% year-over-year and marked the fifth straight quarter of consumable revenue growth, representing the increasing install base and continued improvement in utilization since the start of the pandemic. Finally, AMIA revenue of $6.3 million was up 46% compared to the prior year and roughly flat on a sequential basis. Our commercial presence continues to expand in the region, and we signed additional distributors in the third quarter, including in Spain, in the Middle East, and North Africa, and they have already shown tangible signs of driving new business. As a result of our recent acquisitions, starting this quarter, we will begin sharing both GAAP and non-GAAP results for gross margin, operating expenses, and net income or net loss. We believe that reporting GAAP and non-GAAP measures will provide our investors with a deeper understanding of the company's operational performance. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found at today's release for more information. GAAP gross profit of $15.4 million in the third quarter of 2021 represented a gross margin of 44%. Excluding fair value inventory adjustments and amortization of intangibles, third quarter 2021 non-GAAP gross profit of $15.7 million represented a gross margin of 44.9%. compared to a gross profit of $13.8 million or 44.9% in the second quarter of 2021. Benefits from higher factory utilization were partially offset by expenses we incurred as a result of continuously enhancing our manufacturing process as we drive higher volumes through our factory. Year-over-year non-GAAP gross profit was approximately 7.9 points higher compared with 37% in the year-ago quarter, driven by the higher product volume and improved factory utilization. Moving on, GAAP operating expenses were $89.8 million in the third quarter of 2021, which included merger-related expenses of $11.8 million and merger-related compensation expenses associated with equity acceleration in the context of the omnium acquisition of $18.9 million. Excluding merger-related expenses, non-GAAP operating expenses in the third quarter totaled $59.1 million, up 15% sequentially compared with $51.3 million in the second quarter, and 89% higher than $31.2 million in the third quarter of the prior year. The increase in operating expense compared to the previous quarter and last year was primarily a result of higher headcount-related spend in our R&D and commercial organizations and expenses added from acquisitions in the third quarter. In terms of headcount, we ended the quarter with 687 employees. The increase from 492 as of June 30 was primarily due to hiring in our R&D organization as well as the acquisition of Omnium and Circulomics. As of September 30, we've also doubled our quota carrying headcount from the start of the year with further growth expected in the fourth quarter. GAAP operating expenses in the third quarter included a total non-cash stock-based compensation expense of $26.6 million, which included $11.5 million expense related to the acceleration of certain equity awards as part of the acquisition of Omnium. Excluding merger-related non-cash stock-based compensation, third quarter 2021 non-GAAP stock-based compensation was $15.1 million compared to $13.9 million in the prior quarter and $4.3 million in the third quarter of 2020. In Q3, we booked a discrete income tax benefit related to the acquisition of On the Omen Circulomics. Both acquisitions were considered non-taxable acquisitions for tax purposes, Therefore, the acquired intangible assets do not receive a tax basis adjustment to fair value. The book-to-tax basis difference resulted in a release of a portion of the valuation allowance. The end result was a one-time discrete non-cash income tax benefit on the GAAP P&L of $94.8 million in the quarter. Interest expense in the third quarter of $3.7 million reflects interest expense associated with our convertible note. GAAP net income in the third quarter of 2021 was $16.5 million or $0.08 per basic and diluted share. Excluding merger-related adjustments, non-GAAP net loss was $47.2 million and net loss per share was $0.23 compared to non-GAAP net loss of $41 million and net loss per share of $0.21 in the second quarter of 2021. and a non-GAAP net loss of $23.7 million or net loss of 14 cents per share in the third quarter of 2020. Now turning to our balance sheet, we ended the third quarter with $1.0 billion in unrestricted cash and investments compared with $1.14 billion at the end of last quarter and $319 million at the end of 2020. Inventory balances increased in the third quarter to $18.3 million, representing 4.2 inventory terms compared with $18.0 million at the end of the second quarter of 2021, which represented 3.9 inventory terms. Accounts receivable increased in the third quarter to $23.9 million, reflecting a DSO of 58 days, compared with $19.9 million at the end of the second quarter of 2021, reflecting a DSO of 49 days. Long-term deferred revenue grew approximately $8.3 million in the third quarter to a balance of $18.4 million, the increase reflecting largely a cash receipt from Vitae as part of our collaboration agreement to develop an ultra-high throughput sequencer. Now moving to guidance. For the full year 2021, we are maintaining the guidance we provided on our Q2 earnings call in August. 2021 revenue is expected to grow in the range of 62% to 67% compared to 2020, which represents an annual revenue of approximately $128 million to $132 million. We had a record quarter in Q3 with SQL 2 and 2E shipments at an all-time high. As we previously discussed, quarterly revenue mix can be variable based on timing of instrument placements in a particular quarter. We still expect SQL 2 and 2E installations to grow in the second half from the 79 we installed in the first half of the year. Moving down to P&L, we expect 2021 GAAP gross margin to be between 44% and 45%. On a non-GAAP basis, which excludes merger-related fair value inventory adjustments and amortization of intangible assets to be about 50 basis points higher. In the backdrop of global supply chain pressures, our team has worked diligently to procure sufficient inventory to meet customer demand for the next several quarters and beyond. However, if there is an unexpected material disruption to our global supply chain or higher-than-expected increase in customer demand, it may become difficult to continue to ensure sufficient availability to meet customer demand similar to others in our industry. As a result of supply chain pressures, we are starting to incur higher prices for raw materials and components, which may have an impact of 100 to 200 basis points on our gross margins over the next several quarters. For GAAP operating expenses, we expect the full year to be $263 million and $267 million. Excluding merger related expenses of approximately $31 million in the third quarter, we expect full year non-GAAP operating expenses to be between $232 million and $236 million. This is roughly $15 million higher than our previous full year guidance, largely reflecting reflecting operating expenses from Omnium. This guidance also includes R&D expenses associated with the MVTA collaboration, which we expect to be approaching $20 million by the end of the year. For the full year, we expect interest expense to be approximately $13 million, which reflects interest expense in amortization of debt issuance costs for our convertible notes issued earlier this year. We expect weighted average share count for purposes of EPS for the full year to be approximately 204 million shares and 221 million shares for the fourth quarter. The increase in weighted average share count reflects 11.2 million shares issued for our pipe investment and 8.9 million shares issued for the acquisition consideration in the third quarter. As a reminder, please refer to our press release for a full reference delineation between GAAP and non-GAAP net loss for the nine months ended September 30, 2021. With that, I will turn the call back to Christian. Christian?

Thank you, Susan. With a few months left in 2021, I am proud of all that we've been able to accomplish this year as our achievements position the company well for continued long-term growth. We announced and closed the first two acquisitions in the company's history during the quarter and we're extremely pleased with the Omnium and Circulomics teams as we continue growing our company and building out our new PacBio locations in San Diego and Baltimore. As I discussed earlier, we've performed a more detailed analysis of the markets that we serve, and we're translating these learnings into sales opportunities for our expanded commercial team. We continue to invest heavily in our long-range smart sequencing platform with a focus on improving the end-to-end workflow, dramatically increasing throughput, and lowering the cost of highly accurate long read sequencing. We are also accelerating the development of highly accurate short read sequencing acquired through our acquisition of Omnium. We believe that having both long and short read platforms in our portfolio will enable us to offer solutions to our customers that will help them resolve biology and ultimately enable the promise of genomics to better human health. Finally, I look forward and invite you all to our virtual user group meeting next week, November 9th, where customers from across the globe will share how HiFi sequencing is expanding knowledge of genomes and inspiring advancements in science. And with that, I'd like to open the call for questions. Operator?

Thank you, Sir Christian. Before we start, I'd like to remind all our participants to ask a question. Please press star and the number one on your telephone. Now with our first question, Mr. Tycho Peterson of J.B. Morgan. Please go ahead.

Hey, thanks. I'll start with the supply chain dynamics Susan flagged at the end. I know you're reiterating all your guidance, so it doesn't seem like near-term issues. And I think you shored up semiconductor supply ahead of some of this. But as we look ahead, are there component shortages that you have to kind of worry about, whether it's cameras or semis or otherwise? And are you starting to have to work on inventory in the near term?

Yeah, Tycho, thanks for the question. I'm going to have Mark answer the bulk of it. But one of the good things about having a very strong balance sheet position is that we're able to order well, well in advance. And we've done that. And so we're generally in pretty good shape. But I'm going to ask Mark to step in and address the specifics.

Yeah, Tycho. So Susan mentioned a little bit of extra cost. We have secured some extra supply to make sure that we're OK. You know, the one good thing about having really long lead times on our products is that we can plan far ahead. And so it's actually working a little bit in our favor that, you know, we have significantly long lead times. But, you know, ICs have been one of the hardest things for us to get a hold of, and obviously we'll be battling the audio industry there a little bit. But we feel pretty good about our supply position right now.

Yeah, and I would say, you know, we feel very, very comfortable with the near term and even the first half of next year. And it's really – you know, we're positioning the company well for the second half of next year.

And then on, you know, the end markets, Christian, I appreciate all the incremental color that was super helpful in terms of, you know, your customer segments. Are you able to give us a sense for HiFi penetration? You know, what percentage of customers are using the HiFi reach today? Are some of these things like the NVIDIA and Google enhancements going to be rolled out commercially? And, you know, what's interesting on the new applications front? You know, you mentioned there are a handful of new ones coming.

Yeah, a lot to unpack there, but the, you know, in terms of people using HiFi, we're seeing more and more adoption, people moving away from, you know, moving away from traditional sequencing to HiFi, getting, in fact, I think all of our applications now are HiFi enabled, and so folks are starting to move that way. I suspect that will be the predominant way people continue to go forward. With respect to, you know, kind of some of the informatics advancements, we fully intend to make as much of that commercially available as we can. You know, it really takes a bit of time because you have to think through the compute that people have in their labs already and make sure that the algorithms are capable of of being completed in, you know, kind of the standard customer labs, but clearly high throughput customers, customers with large IT infrastructures already will be able to take advantage of these advancements. And I think that's really important when we look down the road. We talk about, you know, we talk about the end-to-end workflow. And today in my section, I talked a lot about, you know, sample prep and how we're making really great progress there with the launch of our first kits. But it is also continuing to improve the back end. The raw read accuracy continues to improve. And that just gives us more, you know, more opportunities and applications. And you asked about the emerging applications. You know, we've seen some really great progress in AAV with some customers. So I think, you know, gene therapy, CRISPR, kind of those emerging areas I talked about in my section. Synthetic biology is a very powerful area for us. And then, finally, you know, it can't be underestimated, this MOS ISO-Seq paper that came out from the Broad, that enables isoform sequencing, you know, in RNA in a whole new paradigm that short reads can't get access to. And we can do it at a scale now that makes it very competitive and very compelling. I think I would look for us to be developing core kits around that, making those applications simple, easy to use, so customers around the world can get access to it. But as I've said in the past, the more we drive our install base, the more these new applications are going to emerge. We've seen this happen before in our past where You know, as you drive in deeper into the install base and build that install base, new applications emerge from maybe places you weren't thinking and create very significant business opportunities. And we're at the very beginning of that opportunity, which is pretty cool.

Great. Two quick ones before I hop off on Omnium and then also the NVK, you know, clinical whole genome sequencer. Are there milestones over the next year that, you know, you would point us to that we should be paying attention to on the development path? And then speaking of next year, are you willing to make any comments on 22 at this point? I think the street's got you at about $188 million.

Yeah, a simple one on guidance for 22. You know, I think our business is continuing to grow. I think we're positioned really well to keep growing, but I won't give specifics, you know, until we get there. But I do think that, you know, one of my objectives is to keep growing every single quarter and keep you know, keep pushing, driving, delighting our customers with great products. And so I'm excited about 22. If you talk about Omnium and the road to getting that product launch, I think the first thing you'll see is you'll start to see some data come out using our new amplification method. And that new amplification method, so just to take it back a notch, Omnium had fully developed an EPCR front end. In fact, they went through a beta test this past quarter, and it was very successful, actually. But the problem with that front end is that to where we want to go with ultra-high throughput and fully scaled capabilities, we needed to develop a new front end. That front end's already deep in development, and I would expect to see data coming out of sequencing data with that front end. And then I would expect to see conversations about beta tests and early access and things like that before we get to full launch in 23. And my expectation is when we say full launch, we mean global launch anywhere in the world with our fully developed commercialization capability, which I think will give us you know, give us a really powerful platform to get this great technology to market. Okay. Thanks, Christian. Yeah, thanks, Tycho. Oh, you know what? Mark was going to cover Invitae. Sorry, I missed that one.

Sorry, you asked for some key milestones. Obviously, on the Omnium front, do look for some more demonstrated data generation next year. Invitae, we actually have our quarterly joint steering committee with them next week. We're making great progress on all of the concepts around that. We've aligned on all the preliminary assumptions and all the design input. I'm actually looking to exit our concept phase by the end of next week once we get through that meeting. So really encouraged with the way the teams are working together. And we've kicked off some new working groups with Invitae. So we've got a whole sequencing work group. We've got a front-end sample prep where they have amazing automation expertise. And then another team working on the compute and compute infrastructure because you can imagine, you know, sequencing that many genomes is going to require a lot of compute power on the back end. But really remain encouraged with the engagement and looking forward to the meeting with them next week.

Yeah, and I think, you know, to take that development parlance that, you know, Mark was talking about what it means is that the project is still right on track. It's where we would expect it to be at this point, which as we exit concept into the feasibility and then development phases of a program, we will be able to start demonstrating data, demonstrating working units, and really prepare ourselves for launch in accordance with the timeline we've outlined. We haven't really publicly talked about it, but we're right on track.

Great.

Thanks for the update. Yeah.

And for our next question, I'm sorry, Kyle Mixon of Canaccord Genuity. Please go ahead, sir.

Thanks. Hey, guys. Thanks for taking the questions. Congrats on the quarter and pre-netics and the sales team. Great updates. I want to start with kind of like your thoughts on the competitive landscape in Long Read, how that's evolving. Your main long-read competitor has been pretty busy with some publications of their own, highlighting things like using short-read libraries for long-read sequencing, among other things, and also, obviously, publicists on the U.S. So, I guess, are you noticing any change in the competitive landscape of the environment or any changes in types of requests from customers, especially internationally, you know, maybe in Europe or in Asia? Thanks.

Yeah, Kyle, thank you for the question, and, you know, thank you for the comments on the quarter. With respect to our competition in long reads, you know, it's interesting because as we learn more about what, where they're deriving their revenue and we're deriving our revenue, we actually don't overlap very much because in competitive situations, we continue to see that we end up coming out on top. And I think that's because as a clinically focused human, human sequencing, you know, company, our systems are highly reliable. They give you the answers that you want, et cetera. And I think that's one of the reasons why, you know, we continue to grow. They're continuing to grow. Outside of the United States, you know, we're building the commercial infrastructure now so we can reach all those customers. And we're making great progress in China, great progress in Europe, and quite frankly in Japan and Korea. you know, the rest of APAC. And so, from my perspective, I'm really excited about our prospects. And I don't think, you know, I don't think we're slowed down from a competitive dynamic very much at all. However, you know, I respect, I actually think it's great to have competition in the market because it gives, it pushes us hard. We're competitive people. And, you know, we want to just give customers the solutions that they need. And so I think on balance we're, you know, we're respectful of our competition, but I don't think it's slowing down our growth, quite frankly, one iota.

Okay. I appreciate that, Christian. That was really helpful. I agree. The more the merrier, I guess, in Long Read. I wanted to turn to Omnium. I believe that there were plans to possibly submit or announce some publications with Omnium maybe in 2022. I guess is that still the plan or is that a plan? And then I know this was touched on in the last line of questioning, but I guess how was the kind of adjustments to the amplification method going with Omnium? And have you seen any encouraging data thus far? that, you know, I guess it sounds like you'll launch in the first half of 23, which is encouraging, but anything tangible that you've seen so far that really makes you kind of excited?

Yeah, I mean, we're seeing great data every day. I mean, I'm not overstating that one bit. I think the team has done an amazing job. We're, you know, really close to commercial specs on what we want to launch with with the clustering method that we're working on. And we're plugging that right into the sequencing workflow. The sequencer is taking that data and working really well, generating exactly what we would expect, probably a little bit ahead of our schedule, quite frankly. But, you know, we are seeing the first half of 23. In 22, you'll clearly see opportunities for us to present data, hopefully have peer-reviewed publications that everyone can get their arms around and understand how powerful this accuracy really is and show how, you know, the densities of which we'll be able to operate, which will allow you to give, you know, hundreds and hundreds of millions of reads which will make it competitive with other counting-type technologies in the market. And so, you know, we're very encouraged about what we're seeing. And we're also – I talked about this in my prepared remarks, and I'm a bit – I'm pleasantly surprised at how much technical synergy there is between the teams and how aggressively the teams have already been trying to leverage that As you know, the single molecule sequencing technology gives us very powerful core competencies in enzymology and dye chemistry and things like that, surface chemistry, but also in the informatics and simplifying the compute workflow. which if we can solve the problem, you know, challenges we have with smart sequencing, moving a lot of those ideas to SBB will make that development go faster and also probably provide higher quality results than if Omnium would have been standalone. So on every level right now, we are seeing, you know, the integrations going well, the product development, its proper product development, The beta test I talked about on the prior, you know, using the EPCR methods went really well. And why that's important is it shows, you know, it shows the sequencing capability as well as the instrument performance, you know, gives you a lot of indications on how well the instrument's going to work. We're doing some redesign to the instrument, but not, you know, not significant. It's not a ground-up redesign or anything. But it will make it more powerful, more user-friendly, and more capable to really go, you know, get into the market and build that beachhead, as I talked about when we closed the acquisition.

The only other thing I'll add, Kyle, and really impressed with the technological shift, Emily, from EPCR, I'm also really encouraged by the conversation I'm having with people that want to explore what applications with higher read accuracy will benefit. And so some really good external conversations about access to some sample types to really go and start to explore Q40.

I mean, as you know, Mark runs our corporate development group in addition to his day job and has really been taking the charge, leading a lot of very important conversations around the Omnium technology, which bodes well for the future of the technology.

Perfect. I appreciate all that color, guys. That was awesome. Let me just ask one quick one. for a half off about COVID. I'm sure you saw the same trends, but the COVID sequencing data at least published from CDC really stepped up in the summer months. I was wondering if you could break out if that was a material portion of revenue during the third quarter and then related to that, I guess. It's nice to see that the kid exclusion is going to be launched in the fourth quarter, I guess, as expected. Maybe, Mark, could you just walk through just, you know, one more time why that's so meaningful compared to your kind of current ability to do the surveillance testing? Thanks.

The new HiFi Viral? Yeah, maybe start with that. Why HiFi Viral? Why we're so excited about it and why?

I'll let Susan move on to some of the COVID revenues. But, you know, a couple things that this was important for us to prove. First, to prove to ourselves that we could kit a product. And so this is really our first end-to-end workflow with library prep through sequencing kits and with the back end informatics. And developing those capabilities was an important thing for us to do. What I really like about this new product is we've moved now to doing an enrichment with molecular inversion probes, which dramatically improves the workflow and the hands-on time. And so if you compare that to Arctic PCR approaches or other approaches that are on market, you're going to start to see this really seamlessly plug into existing automation and laboratory technicians just embrace this. And so we really wanted to make sure that we were going to create a differentiated product from a workflow perspective. And also from the way we've been able to tile across the virus, we're unlikely to suffer from dropouts. And so discovery of new variants is going to be really important as those continue to emerge. So we do feel that we've created not just a workflow for the first time, but a really good workflow that's going to benefit laboratories around the world and have the data quality that I think is representative of PacBio and what we're trying to build as an organization.

In terms of, Kyle, in terms of revenue volume, we've talked about it kind of in sort of the single digit millions of revenue. And we're continuing to kind of maintain that revenue level. We're expanding the number of customers we're supporting for COVID surveillance. And of course, we're super excited by the HiFi viral product that's going to be released this quarter. So continuing, but for us, it's all about introducing that fully kitted product and getting that out into the market so that we can expand to more customers.

Yeah, the challenge, Kyle, is we get such a small fraction of each sample in terms of dollars because we don't have a kitted solution. And so, albeit more samples are being sequenced, but our revenue is still kind of hovering in the few million dollars a quarter. So You know, I wouldn't say it was a significant contributor to the overperformance of the quarter. It was really the core business. And it was the core. And it wasn't also significant, you know, one-time multi-system orders. Our multi-system order volume is about in the same place from quarter to quarter. So it's really the expansion of the sales force driving those individual instrument orders into new territories. particularly in America as we split territories. And those territory splits are giving us the opportunity to actually talk to more customers. And with us generally raising our profile some, I think that's driving our sales funnel. And our sales funnel is, you know, healthier than it's ever been.

Great. Thanks for all the detail, everyone. Cheers.

And for our next question, from Tejas Savant of Morgan Stanley. Please go ahead, sir.

Hey, guys. Good evening. I just wanted to go back to the instrument guidance, Susan. I think you mentioned doing more than 79 units in the second half of the year. And by my math, that sort of suggests about 35 units as a floor for the fourth quarter. That's a pretty big sequential step down, and I'm sure there's upside to that number. But I'm just curious whether you expect to exceed 44, or did you have any pull forward that we should be thinking about in the third quarter here?

Yes, so I'm going to take that one. And the reality is that we did not have much pull forward from the fourth quarter. The business continues to grow, but we continue to say that the instrument number of will be variable from quarter to quarter as you've seen in each of the three quarters of this year so far. You're right, that range might be more variable than what we've seen in the last few quarters and therefore might be a little too wide. But at this point, you know, we are playing to grow every single quarter and very focused on serving our customers, making sure that we drive instrument placements and, you know, preparing our customers, you know, for 22 as well. So there's a lot of factors involved. And, you know, I think what Susan said is more than 79. So, you know, I think you can take it at that.

Got it. Okay. And, Christian, what are you expecting around the year-end budget flush on that sort of related note here?

That's a good question. We're early enough in the quarter where we don't know that answer yet. We have had good quarters in the past. My first full quarter last year in Q4, we had a very strong quarter because of some budget flush issues. I guess that's not an issue, but budget flush opportunities. Who knows We are being thoughtful about not getting too far over our skis and just continuing to focus on the base business. And if incremental orders come in, we're prepared to supply them. Mark's team has done a great job of getting the supply chain and the manufacturing organization ready to support a whole range of outcomes, which I think is quite exciting.

Got it. And then one of the commercial expansion here, you said you doubled your CODA-carrying sales team a quarter ahead of plan and you plan to grow further in the fourth quarter. Do you have a new target in mind relative to the 22 reps you had as of, you know, year-end 2020? And then any color that you can share in terms of the new rep productivity here?

Yeah, so the new, you know, I'll start with the productivity question. I think the one thing we found, and I think I talked about this on our last call, is that reps that are going into greenfield territories are taking longer to get ramped up than, say, our historical norm. And so they perhaps are taking as much as three quarters, six to nine months to get going. Reps that are going in where we're split a territory and there's already some funnel building are probably on the order of six months. Outside the United States, you know, it's actually much more variable because those territories you have funding. Funding is a much bigger obstacle in the sense of getting through potential tender processes and just lower levels of funding relative to the US in general. But I think on balance, you know, six to nine months is appropriate in what we're seeing. I do think, and I said this in our prepared remarks, that we are seeing the benefit of expanding our commercial organization. And you can tell because you can see how strong America's was, for example, and you're seeing much more single unit orders than we've ever had before, which means we're just reaching more customers and people are excited about the SQL 2E and the value proposition there. They're seeing the advances we're making on the front end and the back end. And so the overall value proposition is becoming more compelling. When I think out into 22, I think we need to continue growing our sales force. And I think the focus will be principally in Europe. But it'll also, you know, Europe will be a core expansion into Asia Pacific. So expanding some in Japan. Definitely in Australia, Korea, I think those are opportunities. I think there's huge opportunities for us in China. You know, it's likely we'll figure out how to, you know, put some more leadership into China so that we can have a much more aggressive effort in that area and expand the N of customers quite a bit. And so that'll be a big push in 22 when you think about sales reps. You know, do we double the sales reps from here? You know, I don't know. We'll wait to see what the budget is. tells us in a few weeks as we wrap it up. But I wouldn't be surprised, you know, that we have to make sure we're reaching as many customers as possible.

Got it. And then one final one on China. For me, Christian, you know, that's obviously a major geography for you. Can you give us some color there, what you're seeing in terms of the order book and pull-through, and how do you see those trends evolving post-NMPA approval here? Sure.

Yeah, I think it's too early to say post-approval. I think we'll wait and see and talk to Barry. That's pretty fresh news. But I think in China, we're seeing the business continue to be strong. Poll flu continues to be decent.

It still continues to be strong, improving since COVID.

Yeah, it continues to improve. And so You know, I think we're really bullish on China. I think there's macro, you know, there's macro factors that are completely outside of our control between the U.S. and China that, you know, maybe I start to lose sleep over a little bit, but, you know, they're completely out of our control. But based on what we control and what we can see and what customers are actually doing with our technology, you know, we're quite encouraged and we think the opportunity is still in front of us, quite frankly.

Got it. Very helpful. Thanks, guys.

Yep.

And for the next question, Dan Brennan of Collin. Please go ahead, sir.

Great. Thanks. Thanks for taking the question. Hey, Christian. Hey, Susan. Maybe just, Christian, you alluded to it a couple times during the call, but just on the funnel itself, I don't know in the past kind of what kind of clarity you provide on it, but just could you give a sense of, you know, what the funnel looks like today, maybe like customer segment and kind of how it's evolved over the course of 2021? Sure.

Yeah, you know, first of all, Dan, congrats on your new role. We're going to miss Doug, but it's good to have you on the ball club. With respect to the funnel itself, let's face it, we haven't given a lot of color, and I don't think we will give a lot of color because those processes internally are evolving and are being built and improving all the time. We've spent a ton of time this year defining the funnel more, creating a common language from which the sales force can communicate with each other and with executives so that we get much better about forecast accuracy so that we can stand up in front of you and give you what we hope to be pretty reliable projections. One of the things we talked about for the first time, some of the segment market areas that we're focused on and our relative revenues, the reality is that the company didn't have any of those capabilities and we had to come in and build that. At this time, it's probably not appropriate for me to give you more color on the specific funnel other than the general the general comment that the increasing commercial footprint is directly impacting the quality and the size of the funnel, which does give us generally better visibility into the future than perhaps we've had in the past. But at any given quarter, since instruments are still such a significant part of our quarterly revenues, And they're quite binary because they're large dollar numbers. They could have an impact on any given quarter, but if you look out over time, we're very encouraged what we see in the funnel that there is a very strong demand for these products. and platforms, this will help us grow. As we grow, we will be able to improve our gross margins. As we improve our gross margins, we'll be able to get better leverage across the business and, you know, make that push towards ultimately getting the cash flow break even and better.

Great. No, that was helpful. Thanks, Christian. Maybe just a high level one on kind of academic funding. Obviously, it seems to be pretty robust from the headline figures and entering 22. Is that something? Clearly, you've got a lot of growth levers at your disposal, which you've discussed, but is that something on top that you're seeing at all? Your salespeople are seeing an impact on that. Just kind of wondering how that translates maybe into the growth that we're going to see over the next 12 to 24 months.

You know, it's interesting, right? Because back in the day, academic used to be, we all both used to rise and fall with academic, and we're much more balanced today with, you know, with academic and, and translational research and even customers like Invitae pushing their products. But we do see the academic funding environment as being reasonably strong at this point and providing us with a good opportunity set. I think Americas are continuing to lead the way there. EMEA, there is pretty reasonable amounts of funding, but it is harder to get to. Our footprint is still a bit too small, and we need to build on that pretty aggressively. But on balance, yes, I think the academic market is in good shape right now. But the beautiful thing for us is we talked about, for example, Children's Mercy of Kansas City. They've already sequenced over 600 genomes and are continuing to grow and expand and Accounts like that, where they really are showing the power of long-read sequencing, are very, very critical to our success as a company, and we're seeing them thrive, which is great.

Excellent. All right. Thank you very much.

And we no longer have questions on the queue. At this point, I would like to turn back the call over to Mr. Todd Friedman for some closing remarks.

Thank you all for joining us today. 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. This concludes our call, and we look forward to updating you on our progress in the fourth quarter.

And this concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect. Thank you all.