Pacific Biosciences of California, Inc.

Hello, and welcome to the PACBio second 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. To withdraw your question, you may press star, then two. Please note, this conference is being recorded. I would now like to turn the call over to Todd Friedman, Head of Investor Relations. Please go ahead.

Thanks, MJ. Good afternoon, and welcome to PACBio's second 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 investor section of our website at www.tacb.com or is furnished on Form 8K available on the Securities and Exchange Commission website at www.sdc.gov. With me today are Christian Henry, President and Chief Executive Officer, and Susan Kim, Chief Financial Officer. Before we begin, I would 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 and operating plans, our REVIO and ONZO systems and their commercialization plans, 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 Anzo systems, expectations with respect to our acquisition of Aptom Biosciences and its products and technologies, and expectations with respect to customer demand of 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 from those projected or discussed including those inherent in developing and commercializing new products. We refer you to the documents that we have filed with the SEC, including our most recent forms 10Q and 10K, and our recent press releases to better understand the risks and uncertainties that could cause actual results to differ. We disdain 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. 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 uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year, including amortization of developed technology. We will also discuss our recently announced acquisition of Apton Biosystems. For more information, we have posted a presentation which can be found on our investor section of our website at www.pacb.com. 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 can accommodate everybody in the queue. I will now turn the call over to Christian.

Thank you, everyone, for joining our call. In today's prepared remarks, I'll update you on several aspects of our business. First, I'll discuss PacBio's record performance in the second quarter and highlight our commercial activities. Second, I'll comment on Revio field performance and customer uptake in its first full quarter since launch. Next, I'll highlight our recent commercial launch of Onso and our acquisition of Apton Biosystems, which was announced earlier today. And then Susan will take us through the financials and guidance in more detail. And finally, at the close, with half the year behind us, I'll share how we are executing against our 2023 priorities I set forth at the beginning of the year. Starting with Q2 performance, the rapid adoption of Revio drove another record quarter for PacBio as we grew revenue by 34% compared to the second quarter of last year. And we exceeded $40 million in quarterly revenue for the first time in our history. with each region posting record revenue. The team did an excellent job of scaling manufacturing and ramping installations, which enabled us to ship 45 REVIOs for revenue and brought our install base to 77 REVIO systems as of June 30th. Additionally, we exited the quarter with a healthy backlog of REVIO instruments. Revio's momentum and our ability to meet customer demand have further increased our confidence to raise our revenue expectations for 2023. We now expect full-year revenue to be between $185 and $190 million, representing 44% to 48% growth over 2022. A diverse set of customers have demonstrated their commitment to Revio, and we have now received orders from approximately 100 different customers to date, including several multi-system orders, Revio Onsel bundles, and steady interest from new customers. In fact, about 45% of instruments ordered in the second quarter came from new to PacBio customers. These included a university in the southeast United States that had previously used an alternative long-read technology due to the throughput constraints on the SQL 2B platform. Requiring scale, reproducibility, and accuracy, the customer decided to re-examine the sequencing landscape and decided to invest in Revio. They now aim to leverage HiFi on several research projects with an emphasis on structural variation and its link to human disease. New customers in the quarter also included the Medical University of Innsbruck, which marks the first Revio in Austria. The customer plans to consolidate multi-approach workflows used to analyze difficult genes which included short-read sequencing, Sanger sequencing, and PCR, and streamline it into targeted long-read panels utilizing HiFi sequencing. New customer orders in the quarter also included a first instrument order in Indonesia from the YSDS Foundation. The group collaborates with academic institutions and hospitals across the country to promote genomic research and improve health. They ordered the Revier Onso bundle to match the best-suited sequencing approach with the appropriate sequencing application. They plan to use long reads and human whole genome sequencing to build a genomic repository across the diverse Indonesian population, as well as metagenomics and targeted applications in difficult-to-sequence genes. The customer plans to leverage the accuracy of sequencing by binding on ONSO to develop targeted panels for liquid biopsy. Revio's increased throughput, accuracy, and direct methylation detection continue to expand the long-range sequencing into population genomics. programs. In the second quarter, Sampled, a leading genomic service provider and biorepository based in New Jersey, received its first review and expects to start sequencing a cohort of samples for a large-scale population genetics program funded by the Department of Veteran Affairs. And in the second quarter, the All of Us program released data from over 1,000 PAC biogenomes. This is an important milestone as more long-read data entering the public research realm can unlock discoveries, prompting more research and interest in long-read genomes. Exactly the type of flywheel effect we've been talking about that can accelerate hi-fi adoption. Customer utilization and Revio field performance in the second quarter indicate a strong start to the product launch. Customers are ramping up their Revio usage with approximately $6 million of our total $13.7 million in consumables revenue attributable to Revio during the quarter. This strength is from higher anticipated utilization from early customers and some customers building a working inventory of consumables in anticipation of larger projects to come. It was also encouraging to see customers place larger standing consumables orders during the quarter. This demonstrates that customers also anticipate a continual flow of samples to keep their Revio busy for quarters to come. As a reminder, our utilization and ordering trends, though positive, are early and represent the first wave of Revio customers. I expect that we will better understand normalized Revio pull through sometime next year. Regarding field performance, on average, customers that are sequencing libraries 15 KB and up continue to hit our specification of approximately 90 gigabases per smart cell. The hard failure rate continues to improve and is well below our launch targets. Later this year, we anticipate launching system updates that will add more functionality and further improve performance. Overall, Revio is proving to be reliable in the field As customers ramp up their sequencing on Revio, it's exciting to see the first wave of scientific publications that this new instrument has powered. In one preprint, researchers from Washington University and the University of Maryland began sequencing on Revio and noted that, quote, highly accurate long-read WGS on the PacBio Revio system is consistent and can generate 30x genome coverage in one smart cell, end quote. They also found consistency across smart cells and coverage, detection of variation, methylation, and de novo assemblies. In another preprint, researchers from the International Weed Consortium, a group of 24 institutions, reported that sequencing of 80 plant species with Revio, and they describe how this enabling pangenomic analysis with the goals of developing sustainable and effective weed control methods and to provide insights about the environmental threats that can greatly reduce crop yields. As a third example, a benchmark study by the All of Us Consortium demonstrated that sequencing data, assemblies, and variant calling from Revio were essentially identical to SQL 2 HiFi datasets, but required only one Revio smart cell instead of three SQL 2 smart cells. Additionally, this study compared the latest PacBio, HiFi, and Nanopore methods. Consistent with previous reports, they observed that nanopore data resulted in a much higher error rate in indel calling than hi-fi data, and that certain variant classes had lower precision with duplex nanopore data compared to standard nanopore data. Customers are pleased not only with Ravio and its game-changing throughput and economics, but also with the quality of service that PacBio provides. With that, I am pleased that our annual customer survey was completed in the quarter, resulting in a final net promoter score of 62. This demonstrates our commitment to delighting our customers, and we look forward to continuing to offer best-in-class support to all of our customers around the globe. Switching gears from long read to short read, I'm excited to announce that earlier today we shipped our first commercial ONSO system. The sequencing by binding, or SPV chemistry, which is at the core of the Onso system, was the early stage technology we acquired from Omnium less than two years ago with the promise of delivering customers an extraordinary level of sequencing accuracy. I congratulate the entire team at BackBio for developing this technology into a highly differentiated platform designed to offer customer sequencing accuracy of 90% of bases at Q40 plus levels or one error in every 10,000 bases, a specification that we believe no other sequencer currently advertises. This is truly monumental, a truly monumental moment for PacBio as it's our second sequencer launched in less than six months. We believe it positions PacBio as the only sequencing company to offer systems specifically designed for both long and short read sequencing and marks the next step in our strategic journey to becoming a multi-platform, multi-omic company that aims to deliver solutions across the genomics ecosystem. One of the first ONSO systems is going to the Translational Genomics Research Institute, or TGen, an early collaborator who found that SBB demonstrated the ability to accurately detect ultra-low variants without the need for high-complexity error correction in a broad range of applications, including infectious disease and liquid biopsy. Now that we are shipping commercially, we plan to scale manufacturing throughout the second half of 2023. Additionally, PacBio expects to complete the installation of this ONSO instrument and ship related consumables later this month. The milestone payment associated with PacBio's acquisition of Omnium will be triggered once both the ONSO instrument and related consumables have been shipped. ONSO is expected to address a significant portion of the short-read sequencing market, particularly where researchers are looking to find and understand very rare variants. As these discoveries are made, we believe that these researchers will then want to scale their experiments, which will require a highly accurate, high-throughput short-read sequencing platform. Therefore, our strategy is to develop a multi-product portfolio with both mid- and high-throughput short-read platforms based on our SBB chemistry. As a result of our strategy, I'm pleased to share that earlier today, we announced that we entered into an agreement to acquire Apton Biosystems, a Bay Area-based company developing a high-throughput short-read sequencer using state-of-the-art clustering chemistry, optics, and image processing. In working with Apton for the past few months, we found that Apton's sequencing platform is capable of generating SVB quality data in a high-throughput sequencing system. As a combined company, we expect to integrate and further optimize the extraordinary accuracy of SVB chemistry with Apton's advanced optics and imaging technologies to develop a differentiated high-throughput sequencer. When launched, we expect this platform to deliver billions of reads per flow cell, sequencing output on par with other high throughput offerings, while providing differentiated accuracy and compelling economics. Increasing density and throughput is one of the key development challenges in launching a high throughput sequencer, and Aton will give us a significant head start in that development. We are bringing over several talented engineers and scientists from Apton's lean organization and have already started planning the development of this next generation sequencer. Of course, many of you may be wondering how this acquisition will impact our operating expenses going forward. Developing a high-throughput short-read sequencer has always been on our product roadmap, and the acquisition will accelerate our development of a high-throughput sequencer and is likely to reduce our overall R&D expenses required to develop the system. Therefore, we remain committed to delivering on our long-range targets while keeping OPEX under 5% compound annual growth through 2026. And this acquisition is not expected to deviate PacBio from that target. In fact, Susan will discuss shortly that we expect operating expenses to be lower than previously anticipated in 2023. And with that, I'll pass the call over to Susan to discuss our financials. Susan?