Pacific Biosciences of California, Inc.

Good day, and thank you for standing by. Welcome to the Pacific Biosciences of California, Inc., fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host today, Todd Friedman, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PACBio's fourth quarter and full year 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 in the investor section of our website at www.pacb.com. or is furnished on Form 8K available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer, Susan Kim, Chief Financial Officer, 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 statements regarding predictions, estimates, plans, expectations, Guidance expectations for, including advantages in connection with new products, technology, and software development and launches, and the anticipated timing of such development and launches. Expectations with respect to our products, expectations resulting from the continued building of the HiFi ecosystem, expectations with respect to our partnerships and collaborations, 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 earlier today and in our filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide used for information to compare our performance relative to forecasts and strategic plans and to benchmark our performance externally against peers. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. 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. In 2021, PacBio underwent a remarkable transformation. And before we get started with our prepared remarks, I'd like to recognize and thank all of our employees. they are the ones that have executed our strategic vision to make that transformation possible thank you thank you thank you on today's call i will start with a brief update on our fourth quarter performance next i will discuss how we executed on our strategy in 2021 to help build the foundation for long-term growth i'll also spend a few minutes outlining our strategic priorities for 2022 then I'll pass the call to Susan to discuss our financial results in more detail and walk through our full-year guidance. The fourth quarter marked the close of PACBio's most transformative year in its history. In the fourth quarter, we achieved record quarterly revenue of $36 million, a 33% increase compared to the fourth quarter of 2020, and our seventh consecutive quarter of sequential growth. Q4 also wrapped up PacBio's most successful year with full year revenue of 130.5 million or 65% growth from 2020. Driving our record annual performance is the increased adoption of the SQL 2 and 2E platforms. Not only did we nearly double our install base in 2021, customers from around the world are using the systems more than ever before. generating the most accurate and complete sequencing data on the market. In the fourth quarter, we installed 48 systems, which is also an all-time quarterly high and brings our total install base to 374 units, an 84% increase compared to the end of 2020. What is encouraging is that over half of the system orders in the fourth quarter were from new PacBio customers, This was the most orders from new customers that we've seen since the launch of the SQL 2 nearly three years ago. Many of our shareholders have asked me how we'll know that our investments in our commercial infrastructure are paying off. So I thought I'd give you a little detail to illustrate how the expanded commercial organization is beginning to make a difference. Over the course of the year, we've been able to accelerate the number of new instrument orders received and recognized as revenue within a quarter. This metric is known as instrument turns. For example, in the first quarter, approximately half our new system placements were from orders turned in that quarter. By the fourth quarter, nearly 90% of our instruments were turned within the quarter. This demonstrates that we're reaching more customers and converting their interest into sales faster than ever before. This example, along with the fact that a sizable portion of our new instruments placed in Q4 were to new customers, shows that our strategy to increase our global commercial footprint is beginning to drive demand across all of our markets. Also encouraging is that over half of our new instrument customers are focused on human germline sequencing. For example, Cincinnati Children's Hospital purchased its first PacBio system in the fourth quarter, and is expected to use the platform in a broad spectrum of human research applications. One of our strategic priorities in 2021 was to demonstrate the utility of HiFi sequencing in clinical whole genome applications. Let me share a few of the recent highlights on how we've progressed on this goal. During 2021, we initiated collaborations with top-tier institutions like Rady's Children's Institute for Genomic Medicine, and Children's Mercy Hospital, Kansas City. As a result of our collaborations, both institutions have shared compelling data highlighting the benefits of long-read hi-fi sequencing. These collaborations are extremely important as they can show the potential of long-read hi-fi sequencing technology to identify variants in areas of the genome that are difficult to sequence with short-read sequencing technologies and, ultimately, increase the diagnostic yield for rare disease cases. We believe that these successful collaborations will drive an inflection point in growth and adoption when we launch higher throughput systems. And in the fourth quarter, we further expanded our collaborations. ARUP laboratories, for example, will explore the use of high-fi whole genome sequencing as part of the Utah NEOC project. which is a project that aims to provide genetic diagnosis for patients in the neonatal intensive care unit. Similarly, with UCLA Health, researchers will investigate the effect of diagnostic yield on unresolved cases by combining full-length isoform sequencing and long-read whole genome sequencing on PacBio instruments. Programs like these are progressing not just in the U.S., but all across the globe. The Care for Rare Canada Consortium will reflex negative short-read sequencing tests with PacBio long-read whole genome sequencing. In Qatar, we delivered two additional SQL2Es to SIDRA, where they've been leveraging HiFi whole genomes to better understand rare disease. In the Netherlands, we delivered two more systems to Radboud University Medical Center, enabling them to further scale HiFi sequencing for programs like the SolveRD European Research Program. Radboot has been using PAC biosequencing for several years, and to paraphrase one of the researchers at the Institute, the HiFi genome trios that have completed with PAC biotechnology to date are likely the most comprehensive they've ever had. And the value of HiFi genomes in unraveling disease-causing, previously hidden structural variants is becoming apparent now. Another exciting program is our pilot study with Genomics England. As you may know, Genomics England completed a project that sequenced over 100,000 whole genomes using short-read technology, most of which were from patients affected by rare diseases or cancer. While this program helped deliver actionable findings to many families, roughly 75% of the rare disease cases are still unsolved. Our pilot study will sequence samples from a subset of these unsolved cases, and our lab has already received the first batch of samples. We are hopeful that additional insight gained during the study may ultimately lead to new therapeutic or clinical trial options for patients with rare disease. Our goal is to demonstrate the power of hi-fi sequencing to help these families find answers. Another strategic priority for the company in 21 was to both expand and accelerate our product development pipeline. By expanding and accelerating our product development programs, we intend to offer multiple sequencing platforms to the market so our customers will have the ability to leverage our technologies at price points and throughput levels that fit their research needs. From our multi-year high throughput development collaboration with Invitae, to our acquisitions of Circulomics and Omnium, and our recently announced desktop sequencer partnership with Berry Genomics, we have transformed PacPio from a single product focus company to an organization poised to deliver multiple platforms and core technologies that reach all ends of the sequencing market. But our focus hasn't solely been on new sequencing platforms. We're also very focused on developing end-to-end solutions for our customers. For example, in mid-November, we launched our first fully kitted solution, HiFi Viral, which was conceived, developed, and commercialized all within 2021. This new kit provides SQL 2 and 2E customers everything they need to sequence the SARS-CoV-2 virus. The HiFi Viral kit provides what we believe to be the most comprehensive view of the SARS-CoV-2 genome on the market today, and due to its unique design, the kit can detect emerging variants without the need for a kit redesign. With just a month and a half of sales in the fourth quarter, we've shipped the kit to 20 global customers, and it was a key driver behind the placement of a handful of SQL 2Es to public health labs during the quarter. We see continued investment, continued instrument demand from research customers, particularly public health labs interested in HiFi viral and expect this to help lay the foundation for future kit development. Moving on to 2022, you can expect PacBio to continue building the ecosystem around HiFi sequencing, which we will anticipate will result in the availability of a diverse set of applications focused on the customer. We are working with organizations like the Broad Institute to bring a single-cell isoseq method to more PacBio users and with Twist Bioscience to develop kits around HiFi sequencing in areas like pharmacogenomics and targeted panels that explore the dark regions of the genome. As HiFi viral drove incremental SQL 2E sales in Q4, a robust ecosystem offering application-specific kits will be an essential driver of our future growth. Last April, we released our version 10.1 sequencing kits that drastically improved performance, speed, and throughput on the Sequel 2e. It improved the polymerase, allowing for more sub-reads, increased HiFi data, and cut DNA input requirements by threefold, opening up more sample types to HiFi sequencing. This April, We plan to launch another update to our library prep and sequencing kits for the SQL 2 and 2E platforms. These kits will cut the upfront workflow time nearly in half, require customers to order and store fewer materials, and lower DNA input requirements even further. We remain committed to streamlining our long read sequencing workflows, shortening time to answer, and enabling our platforms to sequence more sample types. In fact, With the new sequencing kits, we anticipate that DNA input requirements for whole genome sequencing will be decreased fivefold relative to what it was just one year ago to just one microgram per smart cell in human whole genome applications. We're also working with Google Health to co-develop deep learning methods based on their deep consensus algorithms to improve our raw base accuracy. With small improvements to our raw read accuracy, we can shorten our runtimes, increase our throughput, and allow for even greater consensus accuracy. But perhaps what I'm most excited about in the near term, though, is the launch of our upgraded software plan for this April that will equip every SQL 2E system with on-instrument methylation detection with no additional cost or workflow steps. I'd like to take a minute to discuss methylation and why this new feature of the SQL 2 and 2e platforms is poised to provide our customers with even more complete information on every sample sequenced, potentially unlocking greater biological discoveries. As many of you know, epigenetic changes are factors beyond the floor-based DNA sequence that can change the way genes are expressed. Methylation is one example of an epigenetic change. It involves changing the chemical structure of a DNA base by adding a set of atoms called a methyl group. Methylation associated with silencing DNA can also potentially alter gene expression. Over the past several years, our understanding of methylation and its implication on human disease has grown substantially. For example, scientists are discovering that methylation patterns may play a fundamental role in the development of a large and diverse number of human cancers. Because of this, we believe methylation sequencing should be a critical component to genomics and biological research. It's an area ripe for more discovery and with the development of a better detection technology. Detecting both methylation and DNA sequence on certain other platforms requires cumbersome workflows and multiple sequencing runs. As a result, epigenome sequencing has been applied at much smaller scale than genome sequencing on other platforms. With our software release, we believe PacBio will be the only instrument provider at present that can offer simultaneous detection of both DNA sequence and methylation signatures with no changes to sample prep, sequencing performance, and at no additional cost or workflow steps. Using this feature in early access, researchers at Children's Mercy Kansas City reported to us that they uncovered both a long repeat expansion and a hypermethylation in the DMPK gene from the sample of an individual diagnosed with a type of muscular dystrophy. Further, the team believed that directly and accurately connecting genetics and epigenetics with the same HIFI workflow could have significant near-term applicability in medical genomics. So let's move to our short-read sequencing by binding platform acquired through our acquisition of Omnium and Q3. Our product development program is on track. As we shared last month, we've successfully implemented a new clustering method that has enabled higher density, easier workflows, and even improves overall performance and accuracy. We are now consistently observing exquisite accuracy on our alpha systems with over 90% of the reads at Q40 levels or above, or one error in every 10,000 bases. We believe that this is more than 10 times more accurate than other sequencer specifications that have been announced to the market. The team is working diligently to incorporate these advancements into beta systems that we expect will output greater than 120 gigabases per flow cell. We expect these beta systems to be in customer hands in the second half of this year and launch globally in the first half of next year. Now, turning to organizational updates, the integration of Circulomics and Omnium is progressing nicely. We now have a growing R&D presence in San Diego and on the east coast of Baltimore. Our Salesforce can now also directly sell our nanobind extraction kits to all of our customers around the world. We have also completed our commercial leadership build-out with the addition of Lara Torian as General Manager of the Americas and Jason Kang as General Manager of Asia Pacific. We've also appointed Chris Seifert, a PacBio veteran, to lead a new function focused on customer experience. I'm thrilled to have these leaders in our organization as they have deep customer relationships and decades of experience building successful sales and support teams. With that, I'll now 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 fourth quarter 2021 with $36 million in product and service revenue, which represented an increase of 3% from $34.9 million in the third quarter of 2021, and an increase of 33% from $27.1 million in the fourth quarter of 2020. Interim revenue in the fourth quarter was $16.2 million, an increase of 2% sequentially from $15.9 million in the third quarter, and a 19% increase from $13.6 million recorded in the prior year quarter. We delivered 48 SQL 2 and 2E systems during the fourth quarter, growing the install base to 374 systems as of December 31. Turning to consumables, revenue of 15 million in the fourth quarter grew 3% sequentially from 14.6 million in the prior quarter and was up 49% from 10.0 million in the fourth quarter of last year. SQL 2 and 2E consumables represented approximately 82% of our total consumable shipments in the fourth 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 fourth quarter was approximately 150,000. As a reminder, pull-through per instrument is calculated by dividing our quarterly consumable revenue by the SQL 2 and 2E install base at the beginning of the period. Additionally, pull-through figures include HIFI viral, but exclude nanobind extraction kits. In Q4, we observed strong utilization across the install base of SQL 2 and 2Es, and the sequential decline in annualized pull-through in Q4 was largely due to record number of installs we observed in Q3, as well as some consumable warranty-related replacements we made in Q4. Finally, service and other revenue grew to $4.8 million in the fourth quarter compared to $4.4 million in the prior quarter and $3.5 million in the fourth quarter of 2020. Our service revenue growth reflects the growing install base of SQL 2 and 2E. Shifting to a revenue regional view, America's revenue of $18.7 million in Q4 grew 54% compared to the fourth quarter of 2020 with a record number of instruments shipped in the quarter. Moving to Asia Pacific, revenue of $8.3 million reflected 5% growth over the prior year period, largely due to the strength from multi-insurance orders from multiple customers in the fourth quarter of 2020. Of particular note, Japan had strong performance in the fourth quarter of 2021 that included a SQL 2E shipment to the University of the Ryukyus, which will use HiFi in its pilot PanGenome project. This pilot may potentially open up a broader program looking at genomic diversity within Japan. Finally, EMEA revenue of $9.2 million was an all-time high for the region, with revenue growing 29% year-over-year and 44% sequentially. The strength in the fourth quarter was attributable to both multi-insurance orders, such as the SQL 2E shipped to RABBUD in support of the SolveRD research program, as well as multiple insurance placed with new customers. We also added our first commercial service provider in the region, GeneSupport. This highlights the growing demand for HiFi sequencing in the region, and the Switzerland-based company is already marketing a catalog of HiFi sequencing offerings to scientists and researchers across Europe. From a segment market perspective, for the full year 2021, human germline applications represented approximately one-third of our business and was the fastest-growing application. Our next largest market was plant and animal, about 30% of billings, followed by infectious disease and microbiology at over 20%. The remaining comes from oncology and emerging applications. Moving down the P&L, as a reminder, starting last quarter, we began sharing both GAAP and non-GAAP results for gross margin, operating expenses, and net income or net loss. I encourage you to review the GAAP reconciliation of these non-GAAP measures which can be found in today's release for more information. GAAP gross profit of $16.8 million in the fourth quarter of 2021 represented a gross margin of 46.5%. Excluding amortization of intangible assets, fourth quarter 2021 non-GAAP gross profit of $16.9 million represented a gross margin of 47.1%. compared to non-GAAP gross profit of $15.7 million, or 44.9% in the third quarter of 2021. Moving on, GAAP operating expenses were $81.4 million in the fourth quarter of 2021, which included $1.6 million expense from contingent consideration remeasurement, merger-related expenses, and amortization of acquired intangibles. Excluding these expenses, non-GAAP operating expenses in the fourth quarter totaled $79.9 million, up 35% compared with $59.1 million in the third quarter, and 126% higher than $35.4 million in the fourth 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 a full quarter of expense associated with omnium operations. In terms of headcount, we ended the quarter with 728 employees compared to 412 at the end of 2020. GAAP and non-GAAP operating expenses in the fourth quarter included a total non-cash stock-based compensation of $17.5 million compared to non-GAAP stock-based compensation of $15.1 million in the third quarter of 2021 and $4.8 million in the fourth quarter of 2020. GAAP net loss in the fourth quarter of 2021 was 69.3 million or 31 cents per share. Excluding income tax impact resulting from acquisitions, change in fair value contingent consideration, merger related expenses, and the amortization of intangible assets, non-GAAP net loss was 66.4 million and non-GAAP net loss per share was 30 cents compared to a non-GAAP net loss of 47.2 million. and non-GAAP net loss per share of 23 cents in the third quarter of 2021. And a non-GAAP net loss of 23.1 million or non-GAAP net loss of 12 cents per share in the fourth quarter of 2020. Now turning to our balance sheet, we ended the fourth quarter with 1.04 billion in unrestricted cash and investments compared with 1.08 billion at the end of last quarter and 319 million at the end of 2020. Inventory balances increased in the fourth quarter to 24.6 million, representing 3.6 inventory turns, compared with 18.3 million at the end of the third quarter of 2021, representing 4.2 inventory turns. Accounts receivable increased in the fourth quarter to 24.2 million, reflecting a DSO of 62 days, compared with 23.9 million at the end of the third quarter of 2021, reflecting a DSO of 58 days. Long-term deferred revenue grew approximately 6.6 million in the fourth quarter to a balance of 25 million. The increase largely reflected the cash received from Vitae as part of our collaboration agreement to develop an ultra-high throughput sequencer. Now moving to guidance. For the full year 2022, we expect revenue in the range of 160 million to 170 million representing a growth rate of approximately 23% to 30% compared to 2021. In January, we began to see lower utilization largely due to the impact of COVID-19 and associated quarantines slowing lab productivity and in some instances, preventing lab access. Additionally, COVID-19 coupled with the recent macro environment has resulted in some potential delays in capital purchases in the first quarter, particularly in EMEA. As a result, we expect Q1 2022 revenues to be in the range of $31 to $34 million. At the midpoint, this represents approximately 12% growth on a year-over-year basis. Looking forward to the rest of 2022, as the impact of COVID-19 declines, we expect that global activity will accelerate and positively impact our growth. In addition, we have also already received positive feedback from customers on the upcoming enhancements to the SQL 2.2e platform we plan to launch in April. These enhancements, coupled with the commercial investments we have been making, are expected to drive additional customer instrument orders and utilization throughout the rest of 2022. Moving down the P&L, we expect 2022 GAAP gross margin to be between 44.5% and 46.5%. On a non-GAAP basis, which excludes the amortization of intangible assets, we expect gross margin to be about 45% to 47%, with improved leverage from higher manufacturing volumes, partially offset by higher supply chain costs. For operating expenses, we expect the full year to be between $350 million and $360 million. The growth year over year reflects a full year of expenses related to our acquisition of Omnium that closed in September of 2021, annualization of 2021 hires, and an increase in R&D expenses to continue progressing on the development of our next generation platforms. We expect interest and other expense to be approximately $15 million for the full year, reflecting interest expense and amortization of debt issuance costs for our convertible notes issued in 2021. We expect the weighted average share count for purposes of EPS for the full year to be approximately 225 million shares. With that, I will turn the call back to Christian. Christian?

Thank you, Susan. In summary, I'm pleased with our performance in 2021 as we executed against the strategic priorities that were set forth at the beginning of the year. First, we dramatically expanded our commercial presence. We have more than doubled the quota-carrying sales reps from the start of the year. We onboarded a best-in-class leadership team and completely revamped our marketing efforts and commercial operations processes to support our growth. Second, we drove product development with multiple platforms supported by different long- and short-read chemistries across the throughput spectrum, coupled with a novel long-read DNA extraction technology and growing bioinformatic capabilities, 2021 has set the stage to bring industry-changing technology in the years to come. And third, our long-read technology leadership in clinical whole genome sequencing, while still in its infancy, has demonstrated time and again that it has the potential to deliver life-changing results to families around the world. In 2022, we expect to achieve another year of record performance, Our strategic focus is centered on driving product development toward the launch of both long and short read platforms, optimizing the productivity of our newly built commercial organization, and continuing to demonstrate the power of highly accurate sequencing with our industry-leading HiFi technology. In closing, I was happy to see the Nature technology featured fully finished genomes as one of its seven technologies that look to shake up science this year. Looking back at 2021, one crucial revelation that came to the forefront of genomics world is that there are still hundreds of millions of bases missing from the human reference genome. It was like reading a book with whole chapters missing. PacBio HiFi was a key technology for filling in those missing chapters. We're increasingly finding that sequencing genomes in natives and longer stretches is unlocking more discoveries and answering more biological questions. With our technology and development, we believe it's not if, but when hi-fi sequencing becomes the de facto standard in translational research to fully characterize all classes of genetic and epigenetic variants across the complete genome, from telomere to telomere. And with that, I'd like to open the call for questions. Operator?

And thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. And we please ask that you limit yourself to one question and one follow-up. Again, that's one question and one follow-up. Please stand by. We compile the Q&A roster. And our first question comes from Kyle Mikeson from Cannon Court Genuity. Your line is now open.

Kyle, you're here. Hi, guys. Yep. Hey, guys. Thanks for taking the questions. Congrats on the quarter and the transformative year, of course. Just kind of turning to the guidance, though. So the 22 guide and the 1Q guide below the street, and you referenced some things that we didn't hear from your peer last week, the lower January utilization due to COVID and some of the delays. So I just wanted to know if you guys could kind of walk through that with a little bit more detail, kind of a refined point of clarification possibly. I'm just wondering if that's mostly the smaller install base, obviously. The commercial team is growing. The overall revenue base is kind of, you know, it's relatively, it's coming from a lower starting point, obviously. And are you expecting any of these delay placements to kind of come back later in the year? If you could kind of talk about those factors and what contributed to the kind of you know, relatively, you know, weaker, I guess, first half and first quarter performance, that'd be, or expectation at least, that'd be really helpful. Thank you.

Yeah, so thanks for the question, Kyle. So there's a lot, there's a lot to unpack there. You know, if we start with the consumables, we, you know, we ended the year and consumable, you know, consumables were, utilization was starting a bit of a downward trend, but not not very significant, and we were obviously achieving record revenues. But as we looked at the results for January, in all three of our primary territories, we started to see some declines in utilization with respect to consumables. And as we dove into it in early February, we noticed the conversation was that we still see COVID having a bigger impact then, quite frankly, I would have expected. But the reality is that given the fact we have such a smaller revenue base, fewer customers, and customers that are more sensitive, we feel the effect of that more fully. We do believe, though, that utilization will return to more normalized levels and continue to grow. And as a result, that's why we gave the annual guidance of 160 to 170 of revenue. On the instrumentation side, what we're seeing is some of our smaller customers are being impacted by this macro environment. In other words, the funding environment for kind of new companies and companies that perhaps maybe have gone recently public, with the recent declines in volatility in the market have gotten more conservative about their spend. And it's not that their spend is going away, but they are definitely being more thoughtful about how fast and how much scale they scale into the business. And so I think we're suffering from both of those effects. The final thing I'd say is with respect to COVID itself, what's interesting is that our business is much more academically focused and project-based as opposed to being commercial business such as a clinical operation. And as a result, a lot of those customers have been either working from home, slowing the start of their projects in the new year while Omicron has run its course, particularly in the United States. And so I do think that that's having an impact on our Q1 But we do feel good that it's going to recover and, you know, it's going to set us up for a strong year. But, you know, looking at the data from the first six weeks of the year, you know, we felt it was responsible to kind of put the first quarter out there and benchmark from there. So hopefully that helps a little bit.

Yeah, that was great, Christian. Thank you for that. I mean, it's fair. I mean, it kind of confirms what I was, you know, more or less kind of getting to with the question, some of those points there. So that was great. It was great. Just for a follow-up, kind of unrelated, I know you guys weren't with the company at this time, but I figured I would just kind of close because we're kind of close to that spot, basically. I was wondering if you had any sense for the impact on PacBio in terms of new customer acquisitions or utilization when the primary link to long-read business left the market in the early, mid-2020 kind of timeframe. Back then, I didn't ask the question, and it didn't really come up. I mean, honestly... The company was coming off the aluminum merger attempt, and management kind of shot down these synthetic approaches over the years prior. So I'm just curious, though, what the overlap was like, if at all, between the linked read users and the PacBio native long read users. And, you know, at the very least, because, again, I understand this is tough given we're years past that, it would be great if you could talk about the overlap you would expect occurred between the two technologies in terms of applications and users, if you could. That would be great. Thanks.

Yeah, I mean, it's a tough question to answer because none of us were here, you know, back in 2020. So I don't have any real frame of reference there. But what I do have as a frame of reference is looking at the business today and talking to several customers over the past, you know, four weeks or so as the Linked Long Read story is starting to emerge. And what we're finding is that customers that are using our technology are clearly not interested in switching to a synthetic long read. In other words, short reads stitch together to make a pseudo long read. However, there are customers that are new customers that obviously will look at all their options before they make buying decisions. And one thing that's interesting is, I think our funnels for new customers and new customer acquisition still are larger than they've ever been in the history of the company. And so I don't believe that that's having a significant impact on our business today, nor do I expect it to have a big impact on our business over the course of the year. So from my perspective, I don't really have an appreciation for the past. But when I talk to customers today, most customers understand the benefits of native long reads. They understand the power of HiFi and the completeness and the accuracy that you get when you use HiFi technology, and they generally are in favor of choosing that. So we'll obviously see what happens, but we're feeling very good about our position with respect to technology.

Perfect. Okay. Thanks for that. Thanks, guys, for the questions. I'll leave it there. Appreciate it.

Thanks, Kyle.

Thank you. And our next question comes from Taya Savant from Morgan Stanley. Your line is now open.

Hey, guys, good evening, and thanks for the time here. Maybe I'll start with one other guide as well, Christian, or perhaps even Susan. I mean, can you just walk us through some of the embedded assumptions here, Susan, in terms of instrument placements and how you see the consumable trends evolving from that 4Q 150K level?

Yeah, so maybe I'll take that one. When we look at the underlying assumptions, one of the first underlying assumptions is that there are no significant deals in the forecast, deals that would be population seed scale. Now, there are several of those opportunities out in the world that we're pursuing, and so if we achieve one of those projects, it's highly likely we end up doing it better than our guidance. We felt it prudent at this time, because those deals are aperiodic and we don't know when they will happen, that we would leave those as opportunistic upside for the company. So that's the first thing. With respect to consumable pull-through, we do expect pull-through to come down in Q1 because we're seeing lower utilization in January. And so we would expect it to come down relative to Q4 levels. And then as COVID wanes and customers start using their systems, it's likely that it will turn the corner and head back up. But of course, that will be somewhat mitigated or, you know, countered by the fact that we are placing a lot more instruments every quarter. And those instruments have, you know, fairly long ramp time. And we're acquiring so many new customers that the ramp time to getting up to full speed is in fact, longer than what we would typically see. If we have an existing customer where we're adding capacity, those capacity adds are pretty straightforward and it becomes the path to increasing utilization and pull-through is limited by samples, but typically those samples are not far away if they're buying new equipment. If it's a new customer, you're both helping them develop their workflow, and they're acquiring the customer, they're acquiring, you know, the samples they need to run an ongoing business. And so, as a result, that pull-through takes longer to evolve. And so, if we look at it on balance, you know, we do think consumable pull-through will improve, but it will be dependent on, obviously, everyone getting back to work, so to speak, and the ratio or mix of new customers that we achieve in every quarter.

Got it. That's helpful, Christian. And then a quick follow-up on just the instrument cadence here and the uplift you're expecting in the back half of the year. So there's a couple of different dynamics that come to mind, right? You've spoken about the sequel to improvements that you're launching in April, right? I'm not sure if those include the new library prep and sequencing kits as well, but that was, I think, on track for the first half of this year as well. So you have improvements to the current portfolio. On the other hand, presumably, you've got some of these synthetic long read approaches here from the competition potentially coming online in the back half of the year, and it also gets you closer to your own next iteration of the SQL, so to speak. which might sort of throw a wrench in the works in terms of a customer evaluating new purchases. So walk us through the pushes and pulls there and what you're going to do to make sure that the market doesn't sort of freeze up a little bit ahead of those dynamics.

Well, I think the first thing we're going to do is, you know, continuing to demonstrate our commitment to improving the SQL 2 platform and with the 2E and then the new improvements coming in April, we think that gives us a lot of momentum. And if we look at If we look at our actual instrument funnels right now, even today on February 15th, they're stronger, stronger than they've ever been in the history of the company. And so it's a question of getting those customers, basically showing the customers the improvements and why making an investment now in the SQL 2 platform is a valuable investment for them and helps propel their science and how we will be with them as good partners every step of the way. Of course, as you go deeper into the year, there's a lot of emerging priorities and competitors that are coming to market, both synthetic and new short-league competitors as well. And so customers have more choice than ever. And I think what's going to be important for us to keep driving the instrument demand is demonstrating the power of HiFi demonstrating the fact that now that you have a five-day sequencer, the insights that you can get. I mean, just from the first runs that Children's Mercy did, you know, they were sending emails to me and our team talking about all of the great new things that they can do, which we can translate into new applications, which we can drive deeper into the market, which will accelerate and create the flywheel to create more demand. So I think I think the first thing you have to do is continue to demonstrate your value proposition. And I think ours is extremely compelling right now. We have the most accurate, most comprehensive sequencer on the market. We're making it even more accurate and more useful with methylation. On the workflow side, we're simplifying the workflow. And all of these improvements are coming in April. So that gives us plenty of time to you know, leverage these improvements to drive demand throughout the year. And, you know, so for us, we're thinking holistically about the whole workflow, sample to answer. We're thinking about core improvements to the technology itself. And all of these improvements are coming to market. We're enabling more samples to get onto the sequencer. Now we'll be down to one microgram for whole genome applications. And of the input DNA, which just continues. Everything we're doing is opening up the market to more and more samples to drive a more compelling value proposition and to give our sales force, which is now in a really great spot, the ability to kind of move more instruments. And so I think that's where we have to focus first. Down the road, building deep customer relationships is about making sure that your customer's always feel like they're getting maximum utility from their relationship with PacBio. And so if and when new platforms start to get to market, you can be assured, you know, we'll be working with those customers in a way that, you know, makes them excited to be part of the PacBio family.

Got it. Helpful. Thank you.

Yeah.

And thank you. And our next question comes from Tycho Peterson from JP Morgan. Your line is now open.

Hey, good afternoon. Instrument ASPs came down in the fourth quarter. Can you comment, was that tied to public health lab placements, or is there another dynamic going on, and how are you thinking about instrument ASPs for this year?

Yeah, Tycho, one of the drivers of that was public health labs. We did, you know, we did run a... you know, a program so that we could help public health labs get to hi-fi viral capability sooner rather than later, and that had some impact. We're also, you know, we are very, very focused on driving instrument placements across, you know, across the, around the world, and so that has a mix of ASDs, whether it's multi-system deals or specific situations, say, where we're trying to drive penetration into, say, new geographies or, you know, just expand the install base so that we get more people using long read technology. As we look out into 2022, you know, I do think ASPs will be variable and they'll be dependent upon kind of some of the factors that I outlined. But I think they'll probably bounce, they'll really bounce around depending upon the scope and nature of the deal's you know, that we do in terms of customer scaling. So, for example, you know, if a major customer decides to do some major scaling, I suspect you'll probably see some ASP impact from that in that particular quarter. But at the end of the day for us right now, you know, our focus is really driving the install base because obviously that also sets the stage when new platforms come to market, you have a captive customer opportunity to sell into those customers.

And, you know, on Omnium, you know, appreciate the color you provided, 90% of reads at Q40. You know, can you talk about planned timing for getting customer data? Could we get that in the back half of the year with some of those beta placements? What's the latest thinking on price per gig? And then it did look like there was an accounting adjustment, a contingent consideration for just over a million on the fair value of in-process R&D. Can you maybe just talk to what drove that?

Yeah, so first let me start and pass the baton to Mark. He can talk a little bit about, you know, kind of some of the timing associated with Omnium because he owns that project. I guess I own all the projects ultimately. And then maybe Susan can address the in-process IR&D. It's pretty simple. So, Mark, do you want to take a stab at that?

Yeah, happy to, Christian. Okay. So, you know, as we mentioned, Taika, we're going to continue to push on the development here for the next couple of quarters. We do expect to be getting into beta testing the back half of this year. We're already running some customer collaboration samples in-house, and so I would expect even in advance of us formally getting into a beta program. that we will be sharing more customer data that we generated with them. But absolutely, as we push through the back end of this year and get ready for the full commercial launch in the first half of 2023, we'll be sharing more of that. And I think it's really important for people to be able to have that opportunity to assess the accuracy that we're providing with SBB versus other emerging SBS players as well as Chemistry X and others that are going to be demonstrating their utility in the back half of this year.

And price per gig, Mark?

Price per gig, Mark, before we hand it over to Susan? Yeah, sorry, we haven't addressed that formally yet, but expect this to be comparable with other mid-throughput platforms, and in my mind, this is a mid-throughput platform at launch.

Okay, Susan? And, Tycho, with respect to the contingent consideration remeasurement, so as you know, there was a milestone payment as part of the acquisition of Omnium. That milestone payment is held up on the balance sheet. And as we get closer to product launch, as we see positive momentum, you'll see some of that expense get transferred to the P&L. And so the reason we had this $1.1 million expense is because we saw positive results in terms of our development activities with respect to that product launch.

Okay. And then, you know, last one, Christian, just on, you know, competitive dynamics. I appreciate your commentary on synthetic long reads before. I mean, as we think about some of these newer entrants, you know, including Element Loop, I mean, do you think this is market expansion here, you know, with new players coming into the market?

Well, I think, you know, I think that on balance, yeah, the market is large and growing and there's room for lots of players. So I think it's market expansion. But I also think that, I'm still a firm believer that synthetic long reads or stitched together short reads are not really a solution for clinical sequencing. It's just not. When you get more information out of a native long read, whether it's us or any native long read player, you're just going to have a more comprehensive view. You can resolve more biology. And if you can do it economically, there's no reason to scale, to stitch together short reads. And so from my perspective, I don't think that this has a material impact on our future. But for the occasional customer who that may have a short read sequencer that may want to do, you know, that may want to do some, a little bit of long read sequencing at, you know, less than 10 KB or 10 KB, I guess, perhaps. You know, I could see that as those, getting them inspired about long reads at all gives us an opportunity to sell into those customers when, you know, when they start to get serious about, hey, we really need to integrate long reads in a very serious way into our science and our workflows. So from that perspective, it will expand our market to be sure. Okay, thanks.

And thank you. And our next question comes from Dan Brennan from Calend. Your line is now open.

Great, thank you. Thanks for taking the questions, Christian, Susan, and Mark. Maybe the first one, I know, Christine, you talked about record backlog. Are you willing to provide any color on that backlog, maybe how it was compared to last year and any help on kind of how the split of that backlog occurs across the four different segments you discussed? And then I mentioned on the commercial team, you discussed the total employee headcount, which went up a lot, but you also discussed, you know, the ability with new customers, the training that needs to occur in order to get them up and running. I'm wondering, could you give us some color about the external commercial team and maybe the internal team and where that's staying today and are there plans in 22 to significantly expand that to meet the demand you're seeing?

Yeah, so Dan, thanks for that. First, I don't think I ever said that we had record backlog. And so I don't know if you heard that incorrectly, but I don't think we talked about backlog quite frankly at all in the entire call. Sorry about that.

Maybe it was a funnel. I know it's a funnel, yeah.

Yeah, so that's different than Backlog. I'd like to have that entire funnel in Backlog, of course, but what the funnel is, of course, is all of the people, all of the customers that have expressed interest in the products and are interested in buying either the sequencers or going to becoming part of the looking for service labs to get our technology going. And basically, we characterize that funnel according to where we think they are with respect to stage of sale. And the ones at the end are the ones that actually get into the forecast. And then we close on those. And we have aggressively spent 2021 working on building those funnels, driving demand, It was, you know, it was very surprising to me at how little outreach the company had done before I joined the company with respect to trying to reach customers across all the different geographies. You know, I approved a job offer today, just today, for I think it will be our first headcount or at least the only headcount we have in Australia, for example. And so hopefully that will turn into – someone joining the team there. So that's what I mean by our funnels are bigger than they've ever been. In other words, we're seeing more opportunities. There's more excitement. The utility of hi-fi sequencing, the completeness, the ability to call methyl C is really going to help drive demand. So all those things drive the funnel. With respect to headcount, I don't have this specific sales headcount in front of me, but we more than doubled You know, we more than doubled our sales force in 2021. So I think we have almost 50, not quite, direct sales reps. In 22, we're going to continue to grow the sales force, really focusing on quota-carrying, you know, sales reps, so folks that will have quotas and will be accountable to meeting the customers. We'll also be growing sales. our ability to serve the customers, so the customer support and field application specialists, particularly outside the United States, you know, in areas where we just have been underrepresented. So we'll be focusing there. But for the most part, the heaviest lift was done in 21. And so I'm really happy with that because, you know, that was really important to set the stage to drive long-term growth. And now, you know, now it's a question of filling in around the edges and then getting after it and making it happen. So hopefully that helps, Dan.

Yeah, sorry about that. And then as a follow-up, maybe two-parter, just pop seek, just wondering kind of where, you know, where do we stand with all of us in the U.S.? I know there's some betas or, you know, kind of smaller subsets being done on long weeds? Do you have any viewpoint towards when that could expand possibly in the U.S.? I know you have the, you know, you discussed some news with Jill just wondering kind of what's baked in for those in 22 and what the upside is. And then related to an earlier question, so, you know, maybe we'll get some color on the follow-up, but just wondering, you know, baked in within the full year guide between instruments and consumables, you haven't You haven't given kind of a number or a range between how those two segments will break out for your guidance, have you? Or are you willing to do that?

We did not give specifics about the composition of the revenue at this point. And I suspect we will give more color as we get deeper into the year about how that will go. We did talk, Susan did talk about, you know, the back half of the year being stronger than the front half. And obviously... You know, with our immediate headwind with COVID here, you know, that seems pretty obvious probably at this point. But, you know, we do see the total business growing, and our objective is to grow, you know, installs, grow our install base. And, of course, as all of these installs that we did in 21, as well as what we'll do in the early part of 22, they'll all have a compounding effect, on consumable revenue as those systems get up to speed and fully running. And so, you know, we do expect to grow across the board for the year, but we didn't give any specific numbers. And, you know, at this point in time, I think it's better we monitor how we're doing and how that will transpire and give more color as we get deeper into the year. With respect to POPs Week, all of this program is actually – You know, we are a small part of that program today with a key customer, quite frankly, running at full speed. And so we're seeing lots of samples go through there right now. We, you know, there is lots of opportunity to expand all of us. And there is talk about expanding that program for long reads more. We'll see what transpires. We have not included any of that in our forecasts for the year, nor have we included a significant expansion of GEL. And so most of the really large kind of binary on-off type projects, we have kept out of the forecast because, you know, we're really focused on, you know, achieving and meeting our base business objectives across the entire install base around the world and doing what we say we're going to do, you know, every single quarter. And then as these opportunities emerge, of course, we're going after them and we're trying to cultivate them, in fact. And as they come and they come to fruition, then we will, you know, then that will give us opportunities to grow even faster. So that's how I look at it.

Great. Thanks, Christian.

Yeah.

Thank you. And this is going to be our last question coming from Ross Osborne. from Cantor Fitzgerald. Your line is now open.

Hi, everyone. Thanks for taking my questions. So just going back to guidance and moving down the P&L, the gross margin, so you came in a couple hundred bips ahead of the street for the 4Q, but I believe you started calling out some supply chain headwinds on a 3Q call. Can you quantify the impact on the fourth quarter and then what you're seeing this year, just kind of giving a below-the-street guide? And then I'll go ahead and ask a follow-up question. How comfortable are you with current inventory levels, given those headlines, and then estimated customer demand? Thanks.

Yeah. Hey, Susan, why don't you address the gross margins?

Happy to. So in Q4, we started to see some of the impact from higher costs due to global supply chain constraints, but it didn't have a material impact. I would say it was half a percent in Q4. Looking ahead into 2022, we do expect the impact on our gross margins to be higher. What I had indicated previously, I said one to two points of margin in 2022. I think it's going to be at the higher end of that range, just given the nature of some of the costs rising. But what is good is that our procurement team is being very proactive about ensuring that we get the components we need. to be able to meet demand. So from that perspective, we're doing very well, but it does come with a cost.

Yeah. And when you think about, you know, kind of building up inventory to serve customers, one thing that I've asked the team to do is build up some more smart cell inventory than we normally otherwise would normally carry. And the reason for that is if, you know, if parts of our team I got COVID and we couldn't manufacture for a while. I want to make sure that we don't have any supply disruption. And the teams responded beautifully to that. And, you know, the purchasing group doesn't get enough credit, quite frankly. They've secured the vast majority of supply required to manufacture what we see as the demand for smart cells over the course of the year. On the instrument side, it is a bit more hand-to-mouth. in the sense that, you know, we're fighting for the same FPGAs and other ICs that other companies are, but so far it hasn't had an impact on our business. And, you know, looking ahead in the near term, it doesn't look to have a significant impact. The team has been able to manage, you know, manage that risk appropriately. So it is something that we're looking at every single day and, you know, making sure that we could serve all of our customers around the world in the best way that we can.

Got it. Thank you.

Thank you. And thank you. And now I would like to turn the call back over to Christian Henry for closing remarks.

Sure. Thank you. So let me just wrap up and thank everyone for participating today. You know, we had a great year in 2021, and we put the company in the best position in its history to have another record-setting year in 22. The year so far has gotten off to a bit of a slow start, given what we see to be some COVID headwinds, particularly on consumables. And, you know, we're working through that week by week. But we do expect, as COVID starts to wane, that demand will accelerate or activity will accelerate, which will drive further demand. And so we just want to thank everyone on the call for your support, and we look forward to updating everyone as the year progresses. So thank you very much.

And thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.