Pacific Biosciences of California, Inc.

Good day and welcome to the PACBio Fourth Quarter 2024 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 telethon keypad. And to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of Finance and Investment Relations. Please go ahead.

Good afternoon, and welcome to PACBio's fourth quarter 2024 earnings conference call. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the investor section of our website at www.pacb.com or is furnished on Form 8K, available on the Securities and Exchange Commission website at www.sec.gov. A copy of our earnings presentation is also available on the investor section of our website. With me today are Christian Henry, President and Chief Executive Officer, and Michelle Farmer, Chief Accounting Officer. On today's call, we will make forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, guidance, and the amount of the preliminary estimated non-cash impairment charges. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause their actual results to differ materially from those projected or discussed. Please review our SEC filings including our most recent forms 10Q and 10K and our press release to better understand the risks and uncertainties that could cause results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. We also present certain financial information on a non-GAAP basis, which 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. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in our earnings release, which is available on the investor section of our website. For future periods, we are unable to reconcile 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. A recording of today's call will be available shortly after the live call in the Investor section of our website. Those electing to use the replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call. I'll now hand the call over to Christian.

Thank you for joining us today. I'll begin by reviewing our fourth quarter and full year 2024 performance, highlighting key commercial achievements and providing insights into our outlook. Then, our Chief Accounting Officer, Michelle Farmer, will walk through the financials in more depth, and then I'll close with our guidance and outlook for the year. In the fourth quarter, we reported $39.2 million in revenue, driven by the shipment of 23 Revio systems. Additionally, we successfully commenced shipment of our Vega Benchtar platform, delivering seven units ahead of schedule. For the full year, revenue totaled $154 million, reflecting 97 Revio shipments. Our customer base continues to expand significantly, with the Revio platform installed at nearly 200 customers at December 31. Notably, in 2024, approximately 45% of all Revio shipments went to new PacBio instrument customers, demonstrating strong momentum in attracting users transitioning from other sequencing technologies. Meanwhile, there remains a meaningful upgrade opportunity with approximately 125 active SQL 2 and 2e users in the field, many of whom could transition to Revio or Vega in the coming years. The adoption of PacBio iFi long read sequencing continues to accelerate. Total growth in genomic data output accelerated on our platforms with an 81% increase in 2024, up from 68% growth in 2023, highlighting broader utilization of our technology. Since 2020, total sequencing output has expanded more than 12-fold, demonstrating a remarkable increase in hi-fi sequencing activity. Correspondingly, consumable revenue grew 11% year-over-year in 2024 to $70.4 million, representing a 23% compound annual growth rate since 2020. Looking ahead to 2025, we anticipate that customers will continue to navigate an uncertain funding environment, much like in 2024. Macroeconomic pressures are expected to persist, extending sales cycles, particularly for higher CapEx life science instrumentations like Revio. Additionally, the recent announcements regarding NIH funding involving a cap on the Institute's direct funding rates have increased the uncertainty in the academic environment, particularly in the United States. Considering these factors, we expect 2025 revenue to range between $155 million and $170 million, representing 6% year-over-year growth at the midpoint and roughly in line with external growth estimates for the next-generation sequencing market in 2025. While product launches and macro factors have caused our revenue growth to fluctuate over the past few years, it's worth noting that our revenue guidance at the midpoint still reflects a 16% compound annual growth rate since 2020 and significantly outpaces the overall NGS market growth, which again demonstrates the growing adoption of our technology. I'll discuss our full 2025 financial guidance in more detail later in this call. Over the medium term, and as the macroeconomic environment improves, we believe that we can achieve sustained double-digit revenue growth as long-read sequencing continues to expand into new genomic applications. Our key priorities for driving growth include expanding the adoption of HiFi sequencing by accelerating the uptake of the Vega benchtop platform and enhancing the value and usability of Revio with Spark Chemistry. Leveraging recent innovations to substantially increase sequencing throughput while reducing costs, these advances have the potential to bring long-read sequencing closer to price parity with short-read technologies. Delivering end-to-end solutions focusing on clinical applications and where PacBio's HiFi technology provides unique advantages, like Connects for RNA sequencing and PureTarget, a targeted approach for sequencing difficult-to-sequence genes. Notably, in 2024, application and extraction kit revenue grew 56% year-over-year. Our strategy also includes providing turnkey bioinformatics solutions so our customers can go from sample to answer without running complex data analysis pipelines. Lastly, as a result of the continued and recent macroeconomic uncertainty, as well as the recent NIH announcements, we now anticipate turning cash flow positive exiting 2027. We remain focused on lowering our cash burn and believe our approximately $390 million in cash and investments at the end of 2024 will bridge us to becoming cash flow positive based on our current assumptions. Notably, after our note exchange in the fourth quarter, this timeframe still positions cash flow, a PacBio that turned cash flow positive well before our first debt maturity in August of 2029. While we faced challenges in 2024, it was a pivotal year in strengthening our business and advancing our product portfolio. We successfully launched two significant innovations, the Vega Bench Shop Platform and Spark Chemistry for Revio. With the launch of Vega, PacBio offers a suite of long-reach sequencing systems tailored to different customer needs, a first in the company's history. Vega features a smaller footprint, lower capital cost, and reduced throughput compared to Revio, making it an accessible and versatile solution for a broad range of customers. Some of these customers include... Smaller academic labs focus on a range of applications that require less throughput, including RNA sequencing in smaller genomes. Core laboratories investigating transcriptomics and RNA biology, and larger clinically focused labs utilizing hi-fi sequencing for targeted panels. Early customer feedback has been strongly positive. Berry Genomics, one of our first Vega customers, reported that the platform delivers results identical to previous PAC biosystems while offering notable improvements in high-fi read yields, quality values, reduced run times, greater data processing efficiency, and less hands-on time. As a result, Berry Genomics plans to purchase 50 Vega units over the coming years to support its thalassemia and fragile X-assays, underscoring the platform's value in clinical application. Beyond clinical markets, Vega's versatility extends into biodiversity and environmental genomics. At the recent Plant and Animal Genomics Conference, one researcher highlighted how Vega offers a lower entry point cost, increased portability, and a throughput so well-suited for sequencing biodiversity in remote locations. It also noted how it will facilitate best practices in sequencing unique or difficult-to-access fauna in the field. Another customer from the Johns Hopkins University and Cold Spring Harbor Laboratory shared how he looked forward to using the platform for many projects spanning the entire Tree of Life, from identifying numerous factors in human disease, to diversifying and enriching the food supply with new crop species, to understanding the microbial world beneath our very own feet. Our funnel of sales opportunities continues to grow for the Vega platform, especially with potential new customers, as nearly three-quarters of the customers in our sales funnel have never bought a PacBio sequencer before. This demonstrates the potential reach of the platform. While Vega delivers versatility, the Revio system is our most powerful and scalable platform. In the fourth quarter, we enhanced the platform even further as we started shipping our SPARC chemistry. With SPARC, the Revio system can sequence up to 2,500 complete-phase HiFi human genomes a year at a cost below $500 per genome, while significantly lowering DNA input requirements for whole genome sequencing to just 500 nanograms. This represents a 75% reduction. This helped drive new customer adoption in Q4, like the J. Craig Venter Institute, which plans to use Revio to sequence thousands of full diploid phase genomes over the next several years to find missing heritability, resulting from years of SNF studies and short-read sequencing fragments as part of the Institute's overall goal to advance genetic testing for women's health and genetically diverse populations. Last month, at the J.P. Morgan Healthcare Conference, we shared a little bit more about our technology roadmap, which is focused on improving our on-market platforms and developing future platforms to expand margins and increase throughput. These programs include developing higher-density smart cells, which reduce the cost and increase throughput. We expect our next generation of smart cells to yield multiple times the output of today's 25M Regio smart cells. Integrating new smart cell formats that make automating our technology even easier for customers. Migrating to more advanced semiconductor inputs, such as the 300-millimeter wafer instead of 200-millimeter, and this can drive the cost of the smart cell down, enabling us to lower our cost to customers and expand our gross margins. Innovating on our smart cell and reagent technologies to allow customers to sequence in a smart cell more than once. utilizing faster chemistries, which are expected to enable faster run times and more throughput. And finally, leveraging our computational biology team and collaborations to offer more informatics capabilities across the end-to-end solutions to broaden customers' access to advanced bioinformatics pipelines. We've been thrilled with how Vega and Revio have changed the paradigm of highly accurate long-read sequencing, and we're inspired by the development pathway to scale this technology even further. Over the coming years, we look forward to unveiling these technologies to the research community, which is already accelerating its pace of discovery with HiFi. In fact, PacBio technology was cited in over 1,000 publications and preprints in 2024. In particular, we are encouraged by recent publications that substantiate Hi5's ability to further our understanding of genetic and rare diseases, like Radboud University Medical Center's study analyzing 100 challenging patient cases where short-read sequencing failed to identify a genetic cause. In this study, researchers used Revio and detected 93% of pathogenic variants. including complex structural variants and DNA methylation abnormality. The key takeaway here is not just HiFi's ability to improve solve rates, but its potential to replace multiple testing modalities. As a result, Radboud is expanding its sequencing effort to 5,000 additional samples, further demonstrating the clinical impact of HiFi sequencing in rare disease diagnostics. A unique aspect of PacBio HiFi sequencing is its multi-omic capability. That is, it interrogates RNA and epigenetics in addition to DNA. This multi-omic approach was used in a recent study to diagnose a nine-month-old patient with an undiagnosed rare genetic condition. HiFi sequencing uncovered a balanced translocation between chromosomes X and 13, disrupting four key genes through distinct mechanisms. findings that were missed by short-read sequencing. We believe these studies highlight how PacBio's advanced sequencing technology enables groundbreaking genetic discoveries, providing new hope for rare disease patients worldwide. In 2024, we began to see larger-scale genomic testing labs, hospitals, and medical centers adopt HiFi, with several implementing our peer-target library prep kit to develop and improve carrier screening and other genetic tests. We previously disclosed labs like Myriad and Quest in the U.S., which are developing tests on the Revio system. In Europe, BioEssentia uses HiFi for routine testing for certain sensory disorders. As previously mentioned, Radboud University Medical Center has committed to sequencing 5,000 HiFi genomes in a clinical setting focused on rare disease. With the Sequel 2, Berry Genomics is in the final stages of obtaining NMPA approval for its thalassemia carrier screening test in China. This is an important test that the prevalence of carriers of this disease represents over 10% of the population in parts of the country. With Vega, Berry plans to expand its carrier screening test to other indications. 2024 was a pivotal year in our clinical path, with nearly 15% of our revenues coming from LDT labs or children's hospitals, and we had even higher clinical exposure when factoring translational work at research institutes around the world. Looking back on 2024, we also took decisive actions to improve efficiency, reduce costs, and lower cash burn, which we believe will position us to continue to improve our financial profile on delivering our commercial and R&D initiatives. We reduced annualized non-GAAP operating expenses by more than $75 million, aligning spending with our strategic priorities. As a result, we lowered adjusted cash burn each quarter in 2024. We also made progress in taking costs out of our per-unit instrument and consumable manufacturing with REBIO system and consumable COGS 16 and 22% lower, respectively, than where we started the year. And we see a pathway to further reduce per-unit COGS in 2025. We successfully executed on a convertible note exchange, reducing our debt by $259 million and extending the maturity of our 2028 notes by 18 months to August 2029, strengthening our financial flexibility. Finally, we're pleased to announce that Dave Ruggiero has joined as Global Head of Sales and Service. David brings deep experience in sales leadership across technology and life sciences, and his expertise will be instrumental as we expand our global reach, and scale our sequencing solutions. We're also delighted to share that Chris Smith has joined our board of directors. As CEO of Neogenomics, Chris brings extensive expertise in the diagnostics and laboratory testing markets, and we look forward to his insights as we advance our clinical strategy. We thank Devin Line for his service to our board as he steps down and wishes the best in his future endeavors. We are also continuing our search for a new chief financial officer. We're focused on identifying a leader who will help drive our next phase of growth and champion operational efficiency throughout the organization. Now I'll pass the call on to Michelle Farmer to discuss our financials. Michelle?