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.