Pacific Biosciences of California, Inc.

Good day, and welcome to the PACBio first quarter 2023 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 touch-tone sign. Please note, this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of IR. Please go ahead.

Thanks, Chas. Good afternoon, and welcome to PACBio's first quarter 2023 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 Investors section of our website at www.pacb.com or as furnished on Form 8K 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 financial guidance, our REBIO and ANSO systems, and their commercialization plans, the future availability, uses, accuracy, coverage, advantages, quality, or performance of or benefits or expected benefits of using PacFile products or technologies, including our Revio and Anzo systems, and expectations with respect to customer demand for our products and technologies and growth in our business. 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 than those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we file with 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, except as required by law. We will also present certain financial information on a non-GAAP basis during the call. The 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 forecasts 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 press 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 today. We ask that analysts please limit themselves to one question only so that we could accommodate everybody in the queue. With that, I will now turn the call over to Christian.

Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today. Last October, we unveiled Revio, a long-range sequencer that is 15 times more powerful than our previous generation sequencer. The system enables researchers to analyze what we believe are the most complete genomes in the industry, with paradigm-changing scale and economics. And as we saw in Q4, these features captured the imagination of scientists and researchers across the community and we started 2023 with a backlog of 76 systems. In March, we began shipping the Revio system at scale to customers around the world. I'm pleased to say our launch of Revio is progressing extremely well and is ahead of our targets. The demand for our new system continues to be robust, so much so that orders for Revio in the first quarter outpaced our shipments of Revio, resulting in a net increase of instrument backlogs. This sets us up favorably to deliver on our growth targets for the rest of 2023. During the first quarter, we delivered 32 Revio systems, surpassing our expectations and demonstrating that our robust manufacturing capabilities can scale and deliver on new instrument launches. With Revio manufacturing capacity scaling up in the first quarter and customers beginning to ramp down SQL 2e and 2e Consumable spending, PacBio still delivered record revenue of $38.9 million in the first quarter. The initial customer reception of Revio, its robust field performance, and our ability to scale manufacturing has given us the confidence to raise our full-year guidance. We now expect revenue to be $170 million to $185 million for the full year, or 33% to 44% growth year over year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total HiFi capacity in the market for our cumulative SQL 2 and 2E install base. This is extremely important for our growth as the increased demand for long read sequencing is clear. And I believe our customers will ramp and fill their sequencers with both new projects and existing samples that may have been sequenced using other short read technologies. Before I move on, I'd like to congratulate our global service and support teams. They were essential to the successful launch of the platform. I'm happy to report that all 32 instruments have been installed in all regions and have completed their first sequencing runs. Additionally, the platform's early field performance has exceeded our expectations. For runs with sample libraries that are 15 kilobases and higher, our customers average above 90 gigabases of output per smart cell, with many customers exceeding 100 gigabases per smart cell. That's 400 gigabases per 24-hour run on Revio. To put that in perspective, SQL 2E generates just 30 gigabases of sequence in 30 hours. The strong early field performance has given us the confidence to accelerate some shipments in April, and we are now actively shipping instruments according to our manufacturing plan. I'd like to take another minute to discuss the composition of customers who have already received Revio. They are a diverse group that spans 10 countries and includes commercial service providers, academic core labs, children's hospitals, pharma, and agriculture. These customers are expected to use their Revio from large-scale human genome projects and human disease research to plant, animal, and microbial research. The scalability and flexibility of Revio can power multiple omic applications and is expected to ultimately drive a diversified customer and install base as the product launch progresses. To highlight the specifics behind a few of our customers in the past quarter, we start with Grandomics, a longtime PAC bioservice provider based in China who successfully implemented Revio and is now preparing to run large-scale cohort studies, pan-genome projects, and biodiversity sequencing efforts. In its first sequencing run, the company reported an average smart cell yield of over 102 gigabases per smart cell, with median Q scores of Q30 or better. Additionally, the Australian Genome Research Facility, or AGRF, they plan to implement Revio to offer long reads at extraordinary scale and affordable cost to its customers. We've also shipped Revyo to multiple sequencing centers that plan to use Revyo to scale up long reads for the NIH's All of Us program. These examples were just a few, as many other early Revyo customers were willing to share their excitement for the platform and their initial experience on social media. I look forward to many more of these posts this quarter and into the future. Revio opens the door to large-scale genomics, and we are currently tracking several multi-thousand sample genome project opportunities. Revio has already enabled us to win some of these projects, and we are in discussions with several other potential partners. Revio not only gets PacBio a seat at the table for these large-scale programs, but it makes us a top competitor as we can deliver what we believe is the most complete, highest-value human genome. This means potentially more insights into genetic disease, a better understanding of cancer, and ultimately improving human health. We take pride in delivering our customers the high-quality, complete sequencing products and services. Delighting our customers, after all, is one of our core values and is a critical part of our mission. So I'm incredibly pleased with our initial results from our in-progress annual customer survey, showing a net promoter score of over 60, a significant improvement over last year, and higher than other sequencing providers have reported. Our survey closes in a few days, and I look forward to relaying more feedback. We've also continued to see interest from NUPAC bioinstrument customers as one-third of the RevioSystems ordered in the first quarter were from brand-new customers, and over one-third of the systems in our sales pipeline for the remainder of 2023 consist of new customers. In fact, our largest instrument order in Q1 was from a new customer, a European genomic testing lab looking to incorporate HiFi genomes to investigate rare disease cases. The customer ordered multiple systems, they indicated that one of the key factors to implementing Revio was the ability to sequence thousands of hyphi genomes under $1,000 a genome so that they can shift from short-read exomes directly to long-read genomes. Another new customer, a hospital in Canada, decided to reallocate a portion of its budget for a high-throughput short-read sequencer towards a acquiring a Revio and expanding its capabilities in highly accurate long-read sequencing. Revio is also reigniting legacy PacBio customers' interest in leveraging long reads, as Weill Cornell Medical Center ordered Revio for their genomics core, which will be their first PacBio instrument since their RS2. Their team is looking forward to partnering with PacBio and has shared with us that they plan to move several active short read projects in applications like human whole genome, RNA, and epigenetics to Revio once their system is installed. In the near term, we expect most Revio shipments will be to existing SQL 2 and 2e customers, which is why we've been investing so heavily in expanding our install base over the past couple of years. Since the end of 2020, we have grown our SQL 2E install base by 150% and more than doubled our SQL 2 and 2E customers. This has helped set the foundation for a multi-year product transition. After our strong launch, we believe the customer conversion cycle to Revio still has a long runway, as only about one-fifth of our nearly 300 SQL 2E customers have placed orders for Revio. As we turn our focus to our groundbreaking short-read sequencer, Onso, I'm pleased to report that our beta program has been quite successful and our partners continue to sequence on their systems. We have recently enabled each site with our latest 2x150 paired-end chemistry, delivering increased sequencing robustness and reliability over our previous versions. Regarding its performance, we're excited to share that the beta sites are seeing output that achieves our commercial specification of 800 million paired N reads and regularly gets over 90% of the reads between Q40 and Q50. Our beta partners are running samples where low variant allele detection is critical, such as circulating tumor DNA and gene editing analysis. and they're looking forward to sharing additional data from these challenging data sample types. On the operational side, our manufacturing team is finalizing scale-up plans for ONSO. We've completed our first ONSO pilot manufacturing builds in-house, with the first runs going well. And on the commercial front, I'm pleased to announce that we've already received multiple ONSO orders as we continue to build our sales pipelines. We believe Onso is likely to be available for commercial shipment around the end of the second quarter. As one would expect, there's been a lot of attention on Revio and Onso platforms, but we continue to make great progress on improving the sequencing workflow. During the quarter, we launched our latest high-throughput nanobind extraction kits to enable fast, reliable, and scalable large fragment DNA extraction across blood, cells, and tissue samples. This new offering lowers extraction time to less than two hours, minimizes sample input, and eliminates the need of harmful chemicals or mechanical homogenization. The new high throughput protocol is automated for a complete walkaway solution, enabling labs to scale their PAC biosequencing. Also on the front end workflow, we partnered with Corteva Agriscience. We released end-to-end workflows that streamline DNA extraction through library preparation, enabling thousands of samples to be sequenced annually. Corteva received its first revios during the first quarter and is beginning to transition sequencing over to the platform. On the informatics front, we continue to develop the tools for researchers to make impactful discoveries. For example, some of the recent tools that we've developed include smart analysis to phase de novo assemblies target or trgt for tandem repeat genotyping and visualization paraphrase to help call highly homologous genes and h hi-fi cnv for identifying large copy number variants across the genome rolling out new and improved ways to interpret long read data and collaborating with third-party providers is a key pillar to our informatics strategy and will help further drive adoption of our platforms. In addition to making the workflow more accessible, we develop kits to power customers' research across various OMIC applications. In transcriptomics, our recently launched MASI kit has already been ordered by 100 of our customers since its launch late last year. MaSeq addresses transcriptomics and single-cell research, which are incredibly important and rapidly growing areas in sequencing. For example, in a preprint in March, researchers at UCLA and other institutions used PacBio IsoSeq to build a full-length transcriptome atlas of the developing human brain, mapping over 200,000 unique isoforms over 70% of which had never been detected before. This can allow us to understand better risk variances associated with neurodevelopmental disorders and help us reshape our understanding of brain development and disease. And then, just a few weeks ago in cancer research, another preprint described the first isoform resolution colorectal cancer transcriptomic atlas using PacBio IsoSeq to identify several hundred dysregulated transcript structures in tumor cells. Both studies used our legacy IsoSeq solution on SQL 2, but with new solutions like MaSeq and the expansion into bulk IsoSeq, along with the throughput of Revio, we can further enable these groundbreaking studies, which ultimately may translate into improved clinical research outcomes. With that, I'll turn the call over to Susan to discuss our financial results in more detail. Susan?