Pacific Biosciences of California, Inc.

Hello and welcome to the PACBio fourth quarter 2022 earnings 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 from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Todd, please go ahead.

Good afternoon, and welcome to PACBio's fourth 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 on the investor section of our website, www.pacd.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, The future availability uses accuracy, coverage, advantages, quality or performance of, or benefits or expected benefits of using PacBio products or technologies, including our Revio and Onzo systems. 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 these products. We refer you to the documents that we file with the SEC, including our most recent forms, 10Q and 10K, 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, except as required by law. During the call, we will also present certain financial information on a non-GAAP base. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. 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 historical U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the items indicated in 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 so that we could accommodate everybody in the queue. With that, I'll turn the call over to Christian.

Thank you, Todd. Good afternoon and welcome to our fourth quarter results and business highlights call. Thanks for joining us today. We have a lot of exciting news to share and I'll kick things off with an update on our performance in the fourth quarter and 2022. I'll then delve into some exciting developments we've seen in the past few months and wrap up with an update on our market segmentation. Susan will then provide a more in-depth look at our financial results and our guidance. But first, a quick recap on Revio, our most transformative long-read sequencer to date. We are just a few weeks away from broad commercial availability of Revio, which is scheduled for next month. Currently, we have dozens of instruments on the manufacturing floor in our Menlo Park facility, and at this point, we don't see any serious supply chain constraints. As a result, I expect that we'll ship at least 25 Revio systems to customers prior to the end of the quarter. We will continue our manufacturing scale up through the second quarter, and I believe we will be at our planned production rate for 2023 by the end of Q2. This is good news as the Revio platform enables our customers to take on projects in the thousands to tens of thousands of samples. With this scale, we believe Revio will be a game changer for scientists and clinical researchers. What would have taken years or even decades with long read sequencing in the past can now be completed in a fraction of the time and cost with the Revio platform. For years, the scientific community has relied on short-read genomes and exomes, yielding valuable insights into the human genome. However, despite millions of short-read genomes being sequenced, much of the genome remains unactionable today and our understanding of our 20,000 plus genes and their role in driving disease is still quite limited. Further, We now know that phenotype is not solely determined by genes as mutations in non-coding regions can cause certain cancers. Our understanding of the impact of methylation on genetic disease is in its earliest stages, and we also recognize that the importance of both sequence length and accuracy in understanding disorders caused by tandem repeat expansions. It's clear that to better understand the human genome, researchers must be able to interrogate its full complexity with high accuracy. We expect that sequencing with the Revio platform will provide researchers with the most complete and accurate view of the genome in a single assay. With Revio, researchers will be able to interrogate the genome from telomere to telomere, obtain phasing information, structural variation, epigenetic profiles, And of course, single nucleotide variants, all at the scale and affordability required for large projects. The early excitement around Revyo and the immense possibility for genomics support our belief that we can grow our revenue towards our goal of a compound annual growth rate of 40 to 50% through 2026. As we work to achieve our revenue growth targets, we see 2023 as a year of product transition. We expect many SQL 2 and 2E users will migrate over to Revio over the course of the year. These transitions are difficult to precisely predict, and as a result, we may see some temporary variability with respect to consumable revenue. On the instrument side of our business, we expect to see continued strength for Revio throughout the year. Additionally, we do expect to place a modest number of SQL 2E systems, and of course, Onso, our short-read sequencer, remains on track for commercial shipment in Q2 of 2023. As a result, our initial guidance for 2023 is that we expect to achieve between $165 to $180 million in revenue, which represents growth from 29% to 40%. Now, turning to our results. In the fourth quarter, PacBio achieved revenue of $27.4 million. a 24% decrease compared to the previous year's quarter. The decline in revenue was primarily driven by the announcement of the launch of Revio in the fourth quarter, which impacted orders and shipments for SQL 2E. We delivered 18 SQL 2E systems during the fourth quarter, bringing our total install base to 512 SQL 2 and 2E systems as of December 31. However, what truly sets this past quarter apart is that we received orders for 76 Revio systems, a record-breaking start for a PacBio launch and far surpassing our expectations. We have seen a growing excitement around the potential of Revio as indicated by the positive feedback we have received from our customers. At the recent AGBT conference, many customers told us how Revio could help them scale their research and interrogate the genome at unprecedented levels. At the Plant and Animal Genome Conference in January, we saw a deep appreciation for the importance of hi-fi sequencing and the enthusiasm for higher output long-range sequencing in the community. We hosted a PACT workshop where researchers from Corteva, UCLA, and HudsonAlpha discussed how PACT biosequencing advances their work in agrigenomics, biodiversity, and plant evolution. We are thrilled to announce that the first Early Access Revio is en route to researchers at the Broad Institute. Over the next few weeks, the team at the Broad Institute will perform their first internal sequencing runs on the platform, and in March, we expect to begin full commercial shipments. The Broad has already ordered 10 Revio systems to scale long-read sequencing for programs like the NIH's All of Us program. To put that in perspective, 10 Revio systems has the equivalent sequencing power of 150 SQL 2Es. We look forward to supporting this project and more population scale research initiatives to come. While on the topic of all of us, I wanted to discuss a recent preprint from researchers involved in the program, which highlights the utility of long read sequencing. The authors noted that HiFi reads produced the most accurate results for both small and large variants and concluded that, quote, long reads have widespread value for generating complete and accurate variant calls, end quote. The study also showed that PacBio is best in class for calling variants even at lower coverage than other technologies. This supports our belief that even a PacBio genome at tenfold coverage can be more than sufficient for many research projects. At tenfold coverage, Arevio can sequence 12 human genomes in 24 hours, or almost 4,000 genomes per year, at a list price of approximately $330 per genome, with methylation included. The demand for highly accurate long reads is increasing as evidenced by the recognition of long read sequencing as Nature Method's Method of the Year. With innovative studies utilizing PacBio's long reads from the Vertebrate Genome Project, Telomere Consortium, and the Human Pan Genome Reference Consortium, we believe Revio can drive further discovery with its enhanced throughput and cost effectiveness. Our existing customers have also recognized the potential of Revio to accelerate their research. For example, Mohammed bin Rashid University of Medicine and Health Sciences, or MBRU, purchased Sequel 2Es last year and ordered multiple RevYos in the fourth quarter to sequence for a very large-scale research project in Dubai. And the Wellcome Sanger Institute, a longtime user of PacBio for plant and animal research, now plans to increase its use of long reads in human applications, such as single-cell transcriptomics and variant detection with the added power of Revio. Moving on to Onso, our beta program is in full swing at the Broad Institute, Corteva Agriscience, and Weill Cornell, each evaluating how Onso's extraordinary accuracy can benefit their various genomic applications. Feedback so far has been excellent, with one partner sharing that they've been extremely impressed by ONSO's levels of accuracy, and another saying how highly accurate reads will be transformative for many genomic applications, including oncology. We're pleased to announce that we're on schedule to begin commercialization of ONSO in the second quarter, with a launch specification of 400 to 500 million reads and 200 cycle and 300 cycle kits. The expected specification for accuracy of over 90% of the bases at Q40+, and the potential to reach Q50+, through improved library preparation, we believe ONSA will set a new standard in the industry. The system has a competitive list price of $259,000, with the 300-cycle kit listed at $1,995. We're collaborating with workflow partners across the short read ecosystem and we'll provide library prep conversion kits so that any current short read assay can move directly onto the Onso platform. Regarding its capabilities, we have validated Onso's performance through various testing methods, including the Seraseq cell-free DNA control with Agilent library prep and capture and our conversion kit. Internal results demonstrate that Onso is two times more sensitive in detecting variant allele frequency of 0.05% and is 1.4 times higher sensitivity even when applying duplex UMI's at four times the coverage with other short read sequencing technologies. These performance metrics highlight the exceptional value that Onso can bring to the market. offering high accuracy and sensitivity to meet the demands of various genomic applications, including cell-free DNA research. In addition to cell-free DNA, in collaboration with 10X Genomics, ONSO achieved 99.8% of the bases at Q30 or better for single-cell RNA reads, showing the potential use of ultra-high accuracy in single-cell workflows. We are dedicated to providing our customers with comprehensive and streamlined solutions for their sequencing workflows. This includes offering a range of tools and workflows that are designed to support their success, from automation to sample preparation and informatics. Our recent initiatives include expanding our MaSeq program to support new assays on the SQL 2 and 2e and Revio sequencing systems. These kits, which build on the success of last year's MaSeq Concatenation technology for single-cell isoform sequencing includes 16S and bulk isoseq and will be available later this year. Additionally, our bioinformatics team is continuously improving interpretation tools, such as the recently launched paraphrase tool that helps characterize the dark regions of the genome linked to spinal muscular atrophy. On top of our internally developed products and tools, we're partnering throughout the ecosystem to make it more plug and play. As such, we recently introduced the PacBio compatible program designed to make PacBio sequencing more accessible, which includes partners across all ends of the sequencing workflow from automation and sample and library prep to secondary and tertiary analysis tools. Moving on, I want to share an update on our internal market segmentation from the previous year. In 2022, human genomics was the largest portion of our business, accounting for nearly 40% of our revenue. Customers in this segment include GeneDx, who recently ordered a Revio to target difficult-to-sequence genes and sequence human whole genomes for rare diseases with previously inconclusive results. And Radboud University, has leveraged PacBio technology to make numerous genetic discoveries and plans to ramp up from hundreds to thousands of genomes using Revio. Beyond human applications, we expect Revio to be utilized in applied markets like plant and animal genomics, which made up about 25% of our revenue in 2022. In this market, customers like Corteva Agriscience are utilizing PacBio to study plant genomes and identify microbial infectious diseases that affect these plants so they can improve crop yields and drive agricultural sustainability. Plant and animal genomics also include research programs like the Darwin Tree of Life Project, which recently celebrated sequencing its 500th HiFi genome. The program aims to sequence 70,000 species of eukaryotic organisms in Britain and Ireland And we expect Revio to enable the researchers to progress towards this goal. Additionally, infectious disease and microbiology, which represented 20% of our revenue in 2022, includes customers like Bioengineering Lab, who plans to use Revio for metagenomics to discover and characterize communities of microbes for industrial and biomedical applications. About 10% of our 2022 revenue was from oncology applications, with PacBio's highly accurate long reads allowing researchers to uncover novel isoforms, fusions, and structural variants with exceptional accuracy. Looking ahead, we expect to address more of this large market with Onsos potential for extraordinary sensitivity in liquid biopsy applications. The remaining portion of our revenue comes from other and emerging applications. This includes gene editing and gene therapy applications. Finally, we are pleased with the support and interest from investors in our equity raise last month. In an upsized offering, we raised 201 million in gross proceeds, which will further bolster our ability to grow our business and drive towards our goal of positive cash flows during 2026. With that, I'd like to turn the call over to Susan, to discuss our financials and guidance in more detail. Susan?