Pacific Biosciences of California, Inc.

Welcome to the PACBio Second Quarter Fiscal Year 2022 Warnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would like now to turn the conference over to Mr. Todd Friedman, Director of Investor Relations. Please, go ahead.

Good afternoon, and welcome to PACBio's second quarter 2022 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 as furnished on Form 8K available on the Securities and Exchange Commission website at www.sac.gov. With me today are Christian Henry, President and Chief Executive Officer, and Susan Kim, Chief Financial 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, progress, estimates, plans, expectations, intentions, guidance, and others, including expectations with respect to collaborations, cash flow, and product and technology launches. You should not place undue reliance on forward-looking statements because they are subject to assumptions and risks and uncertainties and could cause actual outcomes and results to differ materially from currently anticipated results. These risks and uncertainties, as well as other risks and uncertainties, are more fully described in our press release earlier today and in our Form 8K, Form 10Q, Form 10K, and other filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements, except as required by law. 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 useful information to compare our performance relative to forecasts and strategic plans and to benchmark our performance externally against competitors. Reconciliations between U.S. GAAP and non-GAAP results are presented in the 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 will now turn the call over to Christian.

Good afternoon, everybody. I appreciate you joining us today. On today's call, I'll provide an update on our 2022 revenue outlook, highlight our results for the second quarter of 2022, discuss some of the recent business and commercial successes, and then we'll get into our financial results and guidance in much more detail. September will mark the two-year anniversary of PacBio, and in that time we have undergone a remarkable transformation. First, we've been able to build a talented and experienced team to lead the company and execute a strategy that will leverage our technology and commercial scale to to serve our customers around the globe and drive growth. We also acquired Omno and Circulomics, adding core products and technologies to our portfolio. As a result of these acquisitions and through our aggressive product development investments, we expect to be the first company to commercialize both highly accurate long read and short read technologies, providing our customers with the right product for their application of interest and, as a result, serving the entire genomic sequencing landscape. Additionally, we believe that our portfolio will create significant value for our customers as we provide them with the capabilities required to discover novel biology with unprecedented detail at compelling scale and economics. We have not only invested in developing new technologies, we've also continued to improve our highly accurate SQL 2E platform to provide even more customer value. For example, just this past quarter, we launched the ability for our customers to look at epigenetic markers with each sequencing run for no additional cost. Compared to various short-read sequencing technologies, this feature dramatically simplifies the ability to see epigenetic markers because the workflow doesn't require multiple sequencing runs with different sample preparations to capture all of the data. We've also collaborated with leading organizations to show how highly accurate long reads can transform clinical research. I think you'll agree that PacBio today looks a lot different than it did two years ago. There is no question, though, that we're operating in an uncertain macroeconomic environment. These macro issues do not change our nor our customers' enthusiasm for PacBio sequencing. However, we are finding that these factors broadly play a role in customer purchasing patterns and their ability to operate at scale, especially as our business is currently dependent on large capital purchases. As a result, we have reevaluated our current outlook for the year to take these macroeconomic factors into account. Specifically, we expect EMEA to be lower than our original forecast as we see the region to be most affected by longer purchasing cycles. In addition, foreign exchange headwinds and increased competition are expected to have a greater impact there than in other parts of the world. We're also seeing that some of our larger customers in the region are ramping their utilization to pre-Omicron levels at a slower than anticipated pace due to staffing shortages, among other things. We believe that this has and will continue to have an impact on our consumables revenue for the remainder of the year. In China, the second quarter was impacted by more than we expected from COVID lockdown, and we expect it to take longer for our customers to ramp back to pre-lockdown levels, in addition to the ongoing risk of localized lockdowns that could be reintroduced. For example, lockdowns at certain customer locations prevented us from installing newly acquired SQL 2E systems, which had an impact on consumable revenue in China. Excluding China, we are quite pleased with the performance of the rest of APAC, especially in Japan, where commercial investments made in 2021 are driving significant opportunities and growth for the region. As China returns to a more normal operating environment, we believe our strengthened commercial team will be able to drive diversified growth throughout APAC. In the Americas, Recession fears, volatile capital markets, and a growing number of sequencing entrants are slowing purchasing patterns as well. However, the region remains mostly resilient as it posted record revenue and grew over 50% compared to the second quarter of last year, as we're growing in multiple markets, from human genome to gene editing to microbiome. The strength and diversity of our customers in the U.S. market gives me confidence that other regional headwinds are only temporary, and we will re-accelerate going into the next year and beyond. Considering these broader issues, we have re-examined our full-year forecast, and we are now expecting 2022 revenue to be in the range of $138 to $145 million, or about 8% year-over-year growth at the midpoint. We expect an improving environment through the balance of the year, with both third and fourth quarter growing sequentially. both in total revenue and instruments placed. In fact, consumable shipments are off to a strong start for the quarter, with July being the strongest month one of any quarter this year. While lower than previously forecasted, I want to reiterate that we believe this is primarily due to macroeconomic factors, particularly outside of the United States, which we do believe will be transitory. Our market opportunity has not changed, and we remain committed to our strategy to become a multi-platform company, enabling the most complete and accurate view of the genome. I am confident in our strategy, and I am excited about our progress in developing revolutionary long and short-read platforms, which we believe will be key drivers of our growth. Also, our balance sheet remains strong. At quarter end, we had $899 million in cash and investments. And today, I'm reaffirming our belief that even in spite of the short-term economic challenges we've seen, we have the capital required on our balance sheet to execute on our current development and commercialization plans, which we believe will enable us to reach positive cash flow. This is a top priority for the company. Susan will expand further on the guidance a little later. But first, I'd like to highlight the results of our second quarter. We reported $35.5 million in revenue in the second quarter, representing 16% year-over-year growth, which was in line with our guidance for sequential growth. Q2 was the sixth consecutive quarter of double-digit year-over-year growth, and as I previously mentioned, our Americas region posted record revenue. In Q2, we were pleased to see that about one-third of our SQL 2E placements were brand-new, PacBio instrument customers across all of our target markets. This demonstrates that we continue to grow even amidst higher comps, a maturing product cycle, and broader macroeconomic factors. We've continued to see momentum in human applications as well, with over 40% of our revenue in the first half to customers working on human genomics, compared to just over a third of our revenue in 2021. This includes applications in genetic disease research where highly accurate long reads can help better understand complex genomic variation. For example, another top-tier children's hospital in the United States received its first Sequel IIe's in the second quarter to accelerate its studies into genetic disease. Notably, the customer cited our newly released methylation detection capability as a key differentiator in deciding to purchase these systems. Additionally, we shipped Sequel 2Es to multiple genome centers in the second quarter in support of whole genome research initiatives in the United States. And in Japan, we provided Sequel 2Es to a large-scale service provider in support of ongoing and upcoming cancer research initiatives in the country. Our customers continue demonstrating the power of PacBio HiFi sequencing, through numerous publications and preprints. Notably, the Human Pangenome Reference Consortium, or the HPRC, posted several preprints describing the first human pangenome reference this past quarter. HIFI directly assembled this reference from 47 genetically diverse individuals. The transition from the single linear reference commonly used today to a pangenome reference represents a paradigm shift in human genetics. It improves variant calling and resolution of complex regions such as tandem repeats, segmental duplications, and is more representative of a diverse population. Before building this reference, researchers first benchmarked the best sequencing approaches and determined that highly accurate long reads were best suited technology. This is a shifting of the sequencing paradigm towards a fully phased 6-gigabase genome versus a commonly used 3-gigabase genome, which the HPRC shows HiFi is uniquely suited to assemble. In plant and animal genomics, studies showed a sustained use case for HiFi as accurate long reads are best suited for assembling highly complex genomes. In a preprint last month, researchers from Utah State and other universities compared long read technologies and showed that hi-fi reads, and I quote, hi-fi reads consistently outperform all other data types for both plants and animals and may represent a particularly valuable tool for assembling complex plant genomes. Moving to microbiology, BioPark, a service provider in Korea, purchased a SQL 2E in the second quarter to advance human microbiome and drug-resistant microbial research with funding from a Korean government agency. Other emerging applications like AAV gene vector sequencing with our latest protocol on instrument workflow continue to drive placements as we delivered multiple SQL 2Es to customers working on vector validation and research. In the second quarter, we've progressed our product development to enable more applications, better data, and higher levels of automation and standardization, all while making great progress towards future product launches. We've released custom targeted enrichment capabilities as part of our collaboration with Twist Bioscience. These panels can provide customers a cost-effective and high throughput way to sequence particular genes of interest, delivering comprehensive detection of single nucleotide variants, structural variants, and indels for any genomic interval, including difficult-to-sequence or difficult-to-map regions of the genome. We also reformatted and relaunched our nanobind extraction technology from our circulomics acquisition to be integrated with HiFi, allowing for more seamless sequencing workflow. As it was only launched a few years ago, most of our instrument customers have not yet used the Circulomics Nanobind extraction. This integration opens up the opportunity to get the differentiated product into more customers' hands and fully recognize the synergies between the two technologies. Also, on the workflow side, we've partnered with ILAC and the Robotic Biology Instrument to develop fully automated end-to-end workflows for PacBio's SQL2 and 2E HiFi long read sequencing systems by employing advanced robotics. And in the backdrop of these enhancements, our field performance of smart cells continues to improve as part of our most recent chemistry and software release earlier this year. In fact, the average yield per smart cell is hitting records with over 30% more gigabases of output per cell than we saw in 2021. This on-market improvement enables customers to do more sequencing with SQL 2 than ever before. We made excellent progress towards the launch of new products, such as our Kitted Moth ISO-Seq solution, which remains on track for commercial release in the fourth quarter. Early access customer sites have been identified and will begin using the product later this year. The commercialized kit is expected to have higher and more robust throughput than the original MOS isoseq method outlined in a preprint last year, with reduced library preparation time and reagent use. The solution will come with a SmartLink workflow to produce isoform-level single-cell data compatible with tertiary analysis tools, and will enable the size and scope of experiments that have driven the breakout growth we've seen in single-cell genomics. Meanwhile, early adopters of the MOS-ISO-Seq method, particularly in the oncology and neurodisease research space, tell us that they can now see critical, full-length isoform information missing from their short-read single-cell data. If we move to our sequencing by binding platform development, we shared some exciting data at AGBT around SBB's exquisite accuracy in variant calling performance. After speaking with customers, we left the conference feeling even more invigorated about how SBB's unparalleled accuracy can accelerate genomic discoveries. Our team remains on track for commercial launch in the first half of next year. We're in active discussions with potential beta sites, and we anticipate beginning our full beta program in the next few months. We are also engaging with potential partners across the ecosystem to ensure the system is user-friendly and compatible at launch. Meanwhile, our in-house systems continue to sequence incredibly well, achieving accuracy scores with over 90% of the bases at or above Q40, and the system has demonstrated both single-end 200 base pair read lengths and 2x150 paired end read lengths. And lastly, I'm pleased that we reached an agreement with Invitae in June that provides a roadmap and incentives for them to accelerate their sequencing on PacBio HiFi, and still leverages their expertise in our development of our ultra-high throughput sequencers. I believe these new technologies will be even more important in Invitae's refocused business as they aim to deliver the most comprehensive genomes. Turning to other organizational updates, today we unveiled our first ESG highlights report. The report showcases our approach to environmental sustainability, social justice, and responsible governance and outlines our progress in these areas. Over the coming years, we expect to continue to invest in our ESG program as a key component of our long-term business strategy. And finally, we look forward to welcoming our new Chief Commercial Officer, Jeff Idell, later this month. I've personally worked with Jeff for over a decade, and his knowledge and experience in genomics will drive significant value across PacBio. Now, with that, I'll hand the call over to Susan to talk about our financial results in more detail. Susan?