Pacific Biosciences of California, Inc.

Hello and welcome to the PACBio third quarter fiscal year 2022 financial results conference call. All participants will be in 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 limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PACBio's third 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 Investors section of our website at www.pacb.com, or is furnished on Form 8K available on the Securities and Exchange Commission website at www.scc.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, intentions, guidance, and others, including expectations regarding our REVIO and ONSO systems and their commercialization timeframes. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially from those projected or discussed, including those inherent in developing and commercializing new products. We refer you to the documents that we file with the SEC, including our most recent forms 10-Q and 10-K and our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements 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 combined with U.S. GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans and benchmark our performance externally against competitors. 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. Finally, we will be hosting a question and answer session after our prepared remarks. We ask that analysts please limit themselves to one question and one follow-up question so that we can accommodate everybody in the queue. I will now turn the call over to Christian.

Good afternoon, everybody. Thanks for joining us today as we discuss our third quarter results and business highlights. Before I begin with my prepared remarks, I'd like to remind everyone that we are hosting our first Investor Day in New York City on November 15th. You can find out more about the event in the investor section of our website. On today's call, we will first recap the product announcements we shared two weeks ago at the American Society for Human Genetics Conference in Los Angeles. Then we will discuss our third quarter financial results, and then I'll provide some commentary on our commercial activity during the quarter. Then I'll hand it off to Susan to walk through our quarterly financials in more detail, and of course, as always, there will be plenty of time for Q&A. When I joined the company in September of 2020, I outlined two important aspects of our strategy for growth. First, we needed to develop a new long read platform that offered our customers significantly higher throughput at much lower cost. And second, since we believe that understanding biology is becoming a more multiomic endeavor, we need to develop multiomic capabilities so that we could provide the right solution for our customers depending on the biological question that they are trying to answer. At ASHG on October 25th, with the announcements of Revio and Onso, two groundbreaking new sequencers, we demonstrated that we are well on our way to achieving these two critical aspects of our strategies. Let's start with Revio, our next generation long read sequencer. Revio is expected to provide 15 times more data output than our current flagship sequencer, the SQL 2e. At the core of Revio is a completely redesigned smart cell, which has 25 million zero-mode waveguides, more than three times as many as the Sequel 2e. Revio then utilizes up to four 25m smart cells in every run to enable the sequencing of up to 100 million single molecules of DNA simultaneously. As a result, the system provides up to 360 gigabases of highly accurate HiFi data, enabling researchers to not only see SMVs and indels, but also structural variation and important epigenetic data in every single run. Finally, the runtime has been reduced by 20% to just 24 hours. Revio was designed with the customer in mind, including requiring fewer consumables, and the ability to load the next run while an existing run is in progress. In addition, the 20-fold increase in relative compute power leverages the latest NVIDIA GPUs and enhances base calling with Google Deep Consensus on board. This makes it easier for our customers to start interpreting the data directly from the instrument. We believe Revio is poised to transform the whole genome sequencing market. This platform enables customers to take on large-scale genome projects with the accuracy and completeness of HiFi. One Revio system can sequence up to 1,300 human genomes a year at less than $1,000 per genome at 30x depth coverage, or approximately $11 per gigabase at list price. and at lower coverage, several thousands of genomes per year at just hundreds of dollars per genome. At ASHG, we hosted a packed booth over all three days and demoed the Revio over 150 times. Feedback from potential customers has been fantastic. On social media, we had more than 10 million impressions over the course of the conference, more than tenfold over other instrument providers. Some comments included one researcher calling it, quote, the most important genome sequencer to launch since the Illumina GA2X, end quote. And another customer who has already placed a multi-system order said, quote, it'll be a game changer in the medical genomics field, end quote. We've already booked multi-unit orders from several customers and are actively discussing system orders with dozens more. With excitement around Revio, several customers have asked about an upgrade path, and we're pleased to have customer loyalty programs in place to support their transition from the SQL 2e to Revio. It's clearly a seminal moment that we launched this paradigm-shifting sequencer as PacBio recently surpassed its 1,000th sequencer shift since the launch of the RS platform in 2011. Over the past decade, PacBio long reads have enabled approximately 400 instrument customers to accelerate their research by allowing them to view biology in ways others can't. From assembling telomere to telomere pangenomes to sequencing some of the largest, most complex genomes on this planet, hundreds of publications over the past few years reinforce our belief that the combined accuracy and length of HiFi are unmatched. With the throughput, power, and attractive price point of Revio, we are thrilled to usher in the next phase of PacBio. In addition to Revio, we announced Onso, a mid-throughput short-read sequencer based on the highly accurate sequencing by binding technology we acquired through Omnium last year. ANSO is a highly differentiated sequencer due to the incredible accuracy of the SPB chemistry. Internally, we've consistently demonstrated accuracy at the Q40 plus levels, which we believe is more than 10 times more accurate than other recently announced chemistries. The beta program has commenced, and we've started shipping units to our beta partners. These partners include the Broad Institute, Weill Cornell, and Corteva Agriscience, who will be using their beta systems over the next few months. We look forward to these partners providing valuable feedback on ONSO's performance in the field. Once the beta program is complete and we incorporate their feedback into the product, we will finalize the development and begin commercial scale-up activities. We expect to begin shipping ONSO commercially in the first half of 2023. As a result of all these announcements, we've suspended our financial guidance so that we can understand the impact that Revio will have on the demand for SQL 2E. However, at our investor day on November 15, we expect to share our longer-term financial targets and update you on market response to Revio and ONSO. Let's move on to our Q3 results. We reported $32.3 million in revenue, representing a 7% year-over-year decline, with changes in foreign exchange rates driving 2% of that decline. The decline was driven by lower SQL 2E sales. We believe some customers deferred their instrument purchases in anticipation of a new product launch and that this impact was greater than we anticipated in the quarter, particularly in the Americas region. Other drivers of the instrument shortfall included customers deferring purchases due to lapse-based issues and funding delays. We expect many of the current and deferred opportunities to migrate to REVIO. However, we anticipate of sustained, albeit lower, demand for SQL 2E going into the fourth quarter and into 2023. Since SQL 2's launch nearly four years ago, we've advanced the platform with the 2E upgrade, significantly reduced the secondary analysis time, and lowered data storage needs by up to 90%. Additionally, we launched new kits that reduced DNA input requirements fivefold, seamlessly integrated methylation calling on every run, and released several application protocols and workflows for AAV, SARS-CoV-2 sequencing, and single-cell transcriptomics. As you can see, we've built a robust ecosystem around SQL 2E. It remains an extremely reliable and powerful sequencer at an attractive entry price for customers looking to do lower-throughput, long-read sequencing. Although we shipped fewer instruments than we were forecasting, we continue to expand the SQL 2E customer base with over 40% of our instrument shipments in the quarter to new PacBio customers. In the past four quarters, we have onboarded approximately 65 new instrument customers. SQL 2E's success in attracting new users gives us confidence that the throughput, economic, and workflow improvements of Revio will even further catalyze the next wave of new customers to PacBio. In the third quarter, we were also pleased to report record consumables of 16.1 million, an increase of 10% year-over-year. We saw pull-throughs steadily increase sequentially as customers in China increased utilization and EMEA booked record consumable sales. Outside of new sequencing platforms, perhaps what our customers are most excited about is our recently launched MASI kit and its game-changing potential for transcriptomics and single-cell research. This new kit leverages 10X Genomics single-cell expression technology and allows customers to achieve a 16-fold throughput increase compared to regular single-cell isoseq libraries. Despite being an important component in understanding genetic variation and disease, we still know so little about isoforms because of short-read limitations in sequencing them at their full length. With the combination of throughput and cost improvement provided by MOSSEQ, coupled with the 15-fold improvement with Revio, we believe HiFi will be the go-to technology in single-cell transcriptomics. In response to this launch, a principal investigator from a major university told us that he believes that, quote, it is clear that in the next few years, long read sequencing will become the de facto gold standard in transcriptomics research. Over the past couple of years, we've been broadening our collaborations to deliver customers turnkey solutions for understanding biology. An example is the release of the off-the-shelf target enrichment panels for long-read HiFi sequencing in collaboration with Twist Bioscience. These panels include a 400-gene panel covering medically relevant genes in regions that are difficult to sequence using short-read methods, including genes tied to spinal muscular atrophy, Alzheimer's, and cardiovascular diseases. We're also offering another panel to capture 50 pharmacogenomic genes. By providing targeted panels in addition to whole genome workflows, we can address a broader set of customers across human genomics. Further, we also launched the Tandem Repeat Genotyping Tool, or TRGT, target to allow scientists to fully characterize the sequence and methylation status of tandem repeats across the genome. Genetic variation in tandem repeat regions has been linked to many neurological and intellectual disorders such as ALS, Huntington's disease, and Fragile X. Turning to commercial highlights, in our human germline applications, which again in Q3 represented over one-third of our product revenue, we delivered additional SQL 2Es to support multiple customers in their sequencing for a large, population genome scale project in the United States. Additionally, we shipped multiple SQL 2Es in a competitive deal to a customer in the Middle East planning to launch a large population scale program. We expect this customer to transition to Revio over the next year to accelerate its sample volume. As previously mentioned, we expect some customers to continue sequencing on their SQL 2E platforms like DNA Link in Korea, who purchased a Sequel 2e to begin sequencing for the Korea Disease Control and Prevention Agency, and plans to use HiFi Viral to sequence 10,000 SARS-CoV-2 genomes. And Averro Diagnostics, a new PacBio customer, who purchased a Sequel 2e in the third quarter to support its microbiome DTC test offering, and could potentially scale the system to provide tens of thousands of tests per year. We also expect AAD sequencing applications to continue to use the SQL 2E, with the addition of SQL 2Es in the third quarter shipped to several customers in this application area. Lastly, I'd like to welcome the members of the newly created Scientific Advisory Board. Dr. Ewan Ashley and Dr. Jody Puglisi of Stanford University, and Dr. Jay Shendure from the University of Washington. These renowned leaders in biology and chemistry will provide critical feedback and direction to our product roadmap. We had our first meeting this past week, and I was delighted to hear the SAB's enthusiasm for PacBio's new platforms and what they believe can be accomplished in many diverse genomics applications. Now, with that, I'll hand the call over to Susan to talk about our financial results in more detail. Susan?