Q2 2020 Pacific Biosciences of California Inc Earnings Call
Call at this time, all participants are in listen only mode. After the speakers presentation no real question and answer session to ask the question. During the session you need to press star one on your telephone.
If you require any further assistance during the conference. Please press star zero and operator, we'll be happy to assist you.
I would now like they had the conference over to try mineralogy. Thank you. Please go ahead ma'am.
Thank you.
Good afternoon, and welcome to the Pacific Biosciences second quarter 2020 conference call.
We hope that youre, keeping well during this time around.
Earlier today, we issued a press release outlined in the financial results, we will be discussing on today's call a copy of which is available on the investor section of our website at Www Dot P. H E B dotcom or Alternatively, that's furnished on form 8-K available on the Securities and Exchange Commission.
The website at Www Dot FCC Dot Gov.
With me today, our Mike Hunkapiller, our Chief Executive Officer.
Susan Burns, our Chief Financial Officer, and been gone, our Vice President of Finance and Treasurer.
Before we begin I'd like to remind you that on today's call, we maybe making forward looking statements, including plans and expectations relating to our financial projections research efforts products and other future events, such as the impact of the Cobot 19 pandemic on our business partners customers employees and the use of our products in cold.
19 research.
You should not place undue reliance on forward looking statement, because they are subject to assumptions risks and uncertainties and may differ materially from actual results.
In particular, the extensive covidien 18th <unk> continued impact on our business will depend on several factors, including the severity duration and extend to the pandemic as well as actions taken by government businesses and consumers in response to pandemic.
All of which continue to evolve and remain uncertain at this time.
These risks and uncertainties are more fully described in our securities and Exchange Commission filings, including our most recently filed reports on form 8-K, 10-K and form 10-Q.
Pacific Biosciences undertakes no obligation to update forward looking statement.
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.
Doctors 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 life.
I'll now turn the call over to Mike.
Thanks Robin.
Good afternoon, Thank you for joining us today.
On this call will review our financial results for the previous quarter.
What an update on how the cold with my team pandemic has update it impacted our business and provide some ongoing business highlights.
I'll start with an overview of our Q2 2020 financial results.
See what revenue for the quarter was $8.9 million down 29% from Q2, 2019, but up 122% from Q1 2020.
As we mentioned in our previous earnings call numerous customers had begun to shut down their operations in March which caused a sharp decline in our instrument revenue in Q1.
Many of those customers we opened during the latter half of Q2, which allowed us to deliver an install some of the systems that we backlog at the end of Q1.
We're able to install 23 sequel to systems during the second quarter, which drove the sequential increase in instrument revenue.
We ended the quarter with installed base of 148 sequel to systems.
Consumable revenue for the quarter was $4.8 million down 44% from Q2 2019.
42% sequentially from Q1 2020.
Driven by lower cost for utilization of installed systems through the pandemic.
During the month of April over half about customer sites were shut down.
Many sites began to reopen in May and June by the end of June approximately 20% remains close.
Even among the side sort of reopened many have not yet resumed utilizing their systems at the same right. They were performing quietly shutdowns.
Consumable sales were heavily weighted towards the latter part of the quarter.
Almost half of the quarters consumable sales shipped in June.
Total revenue for the second quarter was $17.1 billion.
Which was down 31% from Q2, 2019, but up 10% sequentially from Q1 2020.
Gross margin for the second quarter was 39%.
Well with a 39% gross margin recorded in Q2 2000, my team and down from 48% in Q1 2020.
Operating expenses for the quarter was $30.1 million, representing a decrease of 11% compared with Q2, 2019, and a decrease of 25% compared with Q1 2020.
We ended the quarter with $120 million in cash and investments on hand.
Susan and then we'll provide more details on the financial metrics later in the call.
Now I'll provide a few comments regarding the cold with 19 pandemic on our business.
One set of metrics that we track is customer utilization of installed pack bio instrument.
Using Q4 2019 system utilization as a base.
Utilization of sequel in sequel to systems. During the first quarter 2020 was generally robust with the exception to the depth and utilization in China starting in February.
It's actually the China started to pick back up in late March gradually improved from Q2. So what is not yet recovered all the way back to where it was in Q4 2019.
In Europe in the U.S. utilization rapidly decreased by over 40% in April began to recover in may and continue to improve in June.
Well the end of June utilization on sequel to systems was somewhat higher than any previous months.
Although utilization of people once systems continued to lag.
In total utilization in June for sequel, one and sequel to systems combined was roughly 80% of where it had been in Q4 2019.
We expect utilization of sequel to systems to continue to increase in second half of this year.
Several of our high usage customers returned to full operation.
Any of these that face difficulty in collecting samples.
Such as large scale plant and animal sample.
Enrolling subjects.
Primarily for large scale human studies during local shutdowns during the pandemic.
With regard to system sales, while we were successful installing more systems in Q2 than we did in Q1, there were significant headwinds and sales through the pandemic. Many customers have delayed capital purchases as your budgets were put on hold in Q2.
Conditions are improving and we have a helping system sales pipeline. However, it is still difficult to predict when and how quickly instrument sales were fully recover.
Operationally APAC bio we've been maintaining a central production of our products are providing both remote an onsite support to our customers since the initial wave of sheltering place orders were put into place in mid March.
Well in hearing to best practice safety protocols to keep our customers employees and vendors safe.
We have secured ore sources of supply they've continued to meet the needs of all customers you have continued to operate through central businesses.
Overall, thanks for the incredible effort submitting a pack bio we continue to run as smoothly as possible.
Switching now to business highlights, we've been making significant progress and driving the adoption of the sequel to system, along with or high five sequencing protocol.
As a reminder, hi Fi protocol enables users to generate highly accurate long reach hi Fi data can outperform either accurate short read our noisy long read data for a large number of sequencing applications.
As a result, I thought it it hi Fi is rapidly becoming the gold standard for these applications.
Recent tweet from the we'll hand Grand don't mix Medical laboratory in China illustrate this point.
Well.
Hi Fi reads is currently the only mature cornerstone innovation in the world that combines long read like with and high accuracy is the tool that all the developers in the third generation sequencing dream of and quote.
Hi, five performance in the Nobel Genome Assembly has been particularly impressive and it is rapidly replacing noisy long read methods for plant and animal genome sequence Assembly projects.
It's already been adopted but large scale by on projects such as the Darwin tree of life and the border with Juno and project.
Species ranging from redwoods.
Threes with a 27 Giga base genome.
To the agent giant hoarded recently introduced into the Pacific Northwest of the U.S. The Flatworms animals with only a few hundred cells have been sequenced with a high five protocol.
Combined with pack Bios updated sample prep methods.
Well I can they'll be used for genome assembly on individual organisms in a variety of tiny species.
So what else studies of intra species variation at the whole genome level, but it's not possible sequencing can only be done but totally many individuals to provide enough DNA for sequencing.
The extends pack bio's capability to support Sciences population genetic studies.
Most of organisms important for basic research help.
Our commercial purposes.
Hi Fi its ability to provide accurate comprehensive analysis of genetic variation ranging from single nucleotide differences too large structural variance in a single sequencing experiment can allow these studies to be performance in a cost effective matter.
Oh, Hi Fi protocol has also become a central to a host of human whole genome programs.
The overall goal of these programs is to allow scientist to understand the breadth of genetic variation the baby important to a host of human health issues.
They include projects to understand diversity ethnic levels in various countries around the world as well as within particular disease cohorts.
Japan genome project for example is working to create reference level genome from 350 individuals varied backgrounds to supplement the single goal standard reference used today.
Solve already in Europe is analyzing 500 genomes to elucidate genetics changes responsible for rare diseases.
These programs and a host of others are key to establishing a superior value Peck bile smart sequencing and human translational research studies.
Well there in general private level programs, they position us to play a much larger role as the cost in throughput Pacbio sequencing continues to improve.
To the point, where it can be used in much larger even population genetics research and clinical studies.
Earlier today, we announced a clinical research collaboration with the sure engine molecular diagnostics company delivering easy to use products for complex testing and genetics and oncology.
The collaboration is aimed at developing molecular assays based on pet bio single molecule real time.
Smart sequencing technology.
Its initial focus will be on researched and support of assay development for the carrier screening market.
Several of the most common carrier genes for autosomal recessive in excellent condition or either technically challenge challenging or inaccessible to traditional amplification and sequencing leading to incomplete coverage.
In the announcement.
Gary D.J. Latham Phd senior Vice President of research and development a surgeon noted quote.
Innovating the amplification and sequencing technologies have each been instrumental in discovering and characterizing challenging disease, causing structural ballot variance.
We were excited to work with pack bio <unk>.
To combine the best of both technologies to build essays that can uniformly result, simple and complex forms of genetic variation for research and clinical applications in quotes.
We noted in our Q1 2020 earnings conference call that RT PCR rather than DNA sequencing would be the main technology for diagnostic testing of the Sars koby to virus responsible for cold with 19 infection.
I think continues to play a role and tracking barrel evolution.
But absent widespread pressure from vaccine or pharmaceutical challenge the virus seems to mutate at a relatively low rate.
[noise] is also increasing study of hosts genomic sequences to help understand why the response by infected individuals very so greatly from one person to another.
Several of these studies are focused on examining the host immune response to the bars, let's sequencing. The anti body repertoire is from patients who have recovered from infection.
If you have already provided antibody sequences that are possible candidates as monoclonal antibodies for prophylactic treatment of the infection.
And pack both smart sequencing has played a role in such studies.
We've been working with the coral bio do modified invalidate, sorry, and validate their smarter immune profiling kit in order to make Foodlink b cell receptor sequencing more accessible to customers studying covert 19 or other areas of immunology.
There's also some evidence that the host H. allay genes play key roles and immune response to the virus and smart sequencing is being used for complete gene sequencing of this complex family with the wide variation in sequence across the human population.
I will now I'll turn it over to Susan to provide more details on our financial results.
Thank you, Mike and good afternoon, everyone.
I will begin my remarks today with the financial overview of our second quarter that ended June Thirtyth 2020 I.
I will then provide details on our operating results for the quarter and 2020 year to date with the comparison to Q2, 2019, and 2019 year to date, respectively.
I will conclude my remarks with a brief discussion of our balance sheet.
Starting with our second quarter 2020, and year to date financial highlight.
During the quarter recognize revenue $17.1 million and incurred a net loss of $23.1 million.
We ended the quarter with $120 million in cash and investments.
Turning to revenue.
$17.1 million product service and other revenue in Q2 of 2020.
A $7.5 million lower.
And then $24.6 million product service and other revenue we recorded in Q2 2019.
Year to date product service and other revenue and 2020 $32.7 million compared to $41 million year to date in 2019.
Breaking down the revenue instrument revenue recognized in Q2, 2020 was $8.9 million down from $12.7 million recognizing Q2 of 2019.
Year to date incident revenue was $13 million and 2020 compared to $18.3 million recognized during the same period last year.
Consumable revenue for the second quarter of 2020 was $4.8 million.
Down from $8.6 million reported second quarter of 2019.
Year to date consumable revenue was $13 million in 2020 compared to $46 million to $16.4 million year to date in 2019.
Service and other revenue $3.3 million in Q2, 2020 flat to the $3.3 million in Q2 2019.
Year to date service and other revenue was $6.7 million 2020 compared to $6.3 million in 29.
In Q2, or 2020, we generated gross profit of $6.6 million compared with the gross profit of $9.6 million in Q2 29 King.
Meanwhile, gross margin in Q2, 2020, 39%, which was flat compared to 39% recorded in Q2 2019.
Year to date gross profit in 2020 was $14.1 million compared to $14.7 million when a similar period and 2019.
Well here to date gross margin in 2020, with 43% compared to 39% for similar period and train 19.
Moving to offerings.
Operating expenses in the second quarter of 2020 totaled $30.1 million compared to $34 million in Q2 of 2019. This decrease is primarily a merger related expenses incurred in Q2 of 29 King.
Noncash stock based compensation included in operating expenses was $2.8 million in Q2, 2020 down from $3.6 million in Q2 2019.
You didn't eight operating expenses in 2020 were $70.3 million compared to $69.2 million year to date and 20 Nike.
As a reminder, and Twain 19, we incurred CNN expenses associated with the ongoing merger and in Q1 2020, we incurred a merger related advisory fee a $6 million.
Non cash stock based compensation, including operating expenses year to date with $6.3 million in 2020 down from 7.5.
Million dollars year to date in 2019.
Breaking down our operating expenses R&D operating expenses in the quarter or $15 million.
Compared to $14.9 million incurred in Q2 of 2019.
Year to date, R&D expenses were $30.3 million compared to $30.4 million.
In year to date 20 Nike.
Sales General and administration expenses in the quarter were $15.1 million down $4 million from a $19.1 million in Q2 2019.
Year to date in 2020 sales general and administrative expenses for $40 million compared to 38.8 million. Thank true any 19.
Turning to our balance sheet as I mentioned, the beginning of my comments, our balance of unrestricted cash and investments was $120 million at the end of the second quarter compared to $142.6 million at the end of the first quarter 2020.
22.6 million dollar cash burn incurred during the.
Included the cash payment of 6 million dollar advisory fees that I mentioned earlier, which was expense in Q1 of 2020 and paid in Q2.
Inventory balances increased in Q2 to $16.8 million from 16.1 at the end of Q1 2020.
Accounts receivable increased in Q2 to $11.3 million from 7.3 million at the end of Q1 2020.
That concludes my remarks on the financial results.
I'd like to turn the call.
Thank you Susan.
In light of the continued uncertainty caused by the common 19 pandemic.
We will not be providing a revenue forecast.
That said, we're continuing to experienced headwinds caused by the pandemic.
As Mike mentioned earlier, a significant number of pack mile customer site tenant shutdown have reopened.
However, those that have reopened have not necessarily resumed operating at their prior run rates.
And at the end of June approximately 20% of the sites remained inactive.
In addition instrument sales are likely to remain challenging as many research institutions in the U.S. and around the world are taking a conservative approach to capital due to the economic impacts a fantastic.
Moving on to gross margin.
Expected lower factory production led to higher period costs in the second quarter.
Which resulted in sequentially lower gross margin.
Paired with Q1.
The impact on her absorb overhead is expected to extend into the third quarter.
Gross margins in the third quarter will likely remain at a similar level into what we experienced in Q2.
Moving onto operating expenses.
Our second quarter operating expense total was in line with our expectations.
We expect for spending level for the remainder of the year to be relatively flat compared with Q2.
Below the operating income line as a reminder, we received a $98 million reverse termination fee from Illumina Inc. Q1.
But have not yet recognized as income.
We anticipate recognizing this non operating income later in the year.
Finally regarding our cash.
Susan mentioned earlier, we ended the quarter with 120 million in cash and investments on hand.
Compared with 142.6 million at the end of Q1.
Cash usage for the second quarter included a one time 6 million dollar payment in connection with the termination of our agreement with Illumina.
We have no such further payments scheduled or contemplated and therefore, our rate a quarterly cash usage should decline significantly compared with the second quarter.
That concludes our prepared remarks, and we will now open the call for questions.
[noise], ladies and gentlemen, if you have a question at this time police Nexstar and the number one and you touched on telephone if your question hasn't been answered or you wish to remove yourself from the Q. Please press the pound key.
First question comes online as Doug Schenkel with Cowen Your line is open.
Hi, good afternoon, and thank you for cooking or questions before getting into it I want to make sure that I. Thank you Susan for all your help over the years I believe this is.
Yeah, that's something screens were recently I think that's gonna be your last conference call before.
So a one way or younger I just wanted to thank you are gone and wish you all the cost under back stock.
Thank you Doug very much Oh, you're why you're welcome all right well. So [laughter] question, maybe just starting on the commercial side subsequent youre official or your official just continuation.
With Illumina many of US expected you to ramp efforts to build out your standalone commercial reached to fully take advantage of all the products much need over the trailing 18 months.
Then of course depends on a cat so Rick without it.
I really ever I guess, a report question here one is recognizing the balance the desire to play off on.
With the uncertainties that the current environment, where are you with your efforts to build up the team and how does that compare to what you think you would have bad if it hadn't done for the pandemic.
Coming off a stronger than expected quarter arm, what some nice momentum. It's here are you now thinking it's time to comfortably play I'm often asked more aggressively with the commercial build out and then three on you have any updated thoughts regarding a potential commercial partnership with other companies that.
Might have complementary or larger commercial reach.
[noise] so.
Mike do you want to go first or would you like me to go first what are you going to sales Rep and then I'll do the next apart.
Okay sure.
So thanks for the questions.
We we continue to remain optimistic of our ability to grow sales.
And despite a pandemic, which has put a damper on our sales in the near term.
We continue to higher.
In the sales team and they actually added several members to that team in recent months.
Yeah in terms of Oh I'm looking at partner So one of the things that we have done its focus much more on a regional our individual company partnerships of new surgeon deal that we are collaboration that we announced earlier.
Earlier this morning that I referred to in my script.
As an example of that.
Were particularly in the U.S. most of the economics diagnostics and still done at the sequencing level.
As LD keys, we decided to partnering there was a viable thing for us to do.
And then in areas like China, We continue to look for partners. We have one is we've announced previously with very genomics there.
There may be other opportunities there and we're looking more at regional partnerships like that I suppose to an all encompassing one in the context of what we've done with.
With illumina facing the merger or in the past switching of companies like Roche.
Okay. That's great. Thank you guys for that and then maybe if I could ask.
A couple.
Question.
First is.
On Colgate's, you talked about the important role to our claim for research and epidemiological purposes.
I'm just wondering share what.
Revenue contribution was specific to cope it and then the second cleanup is just on air.
For sequel to some quick math I'm, assuming up doing it right just back if you were pretty stable what the past couple of quarters like I just want to make sure that's right. Thank you.
Hi, Yes, Doug I mean, I'll answer the last questioner firstly on the sequel to Asps have been pretty stable. So no significant changes there.
With respect to your question on.
Revenues generated directly related to cover 19.
Yes ill reference.
Mike said in the script.
There's not a lot of our.
Current activities were laid very well to they all the.
PCR type testing that's going on today.
Theres certainly a lotta research going on on the host immune response.
And there have been a couple of opportunities out there that we've taken advantage of but.
By and large it's been a pretty small portion of our revenues in the near term.
Okay.
That makes sense. Thank you guys appreciate it.
Thank you.
Thank you and our next question comes a line of college with Cantor Fitzgerald. One your line is open.
Hey, guys. Thank you for out of the questions. So just wondering if you're talking about quite some TRASM quarter and your expectations for the rest of the year. So.
Can you just quantify the number plates in side were delayed in the second quarter.
And to be listen what come back into the third quarter fourth quarter. Then also of course the police since that were delayed from the first quarter that occurred in the second quarter. If you can just provide some detail that'd be helpful.
Oh, yeah trying to put that into context Kyle so.
There are definitely worse.
Placements that workload delayed in the first quarter win.
The pandemic hidden and people are sheltering in place in March.
Than.
We otherwise would have installed more systems in Q1.
That said you know typically what happens is because we book a fair number systems each quarter and will install some of those systems, but actually a lot of the systems that we book in a quarter will be installed in the subsequent quarter and so.
In the second quarter, a pretty good amount.
What was installed actually came from the backlog that was in Q1.
I don't know that.
There were.
A lot of delayed.
Let's say installs in the second quarter.
[music].
Due to the pandemic nothing it wasn't like what happened in the first quarter, where literally people are just reacting and shutting down.
When the shelter in place orders went into place.
Right that mix and sounds like capacity is near.
Yup level. So that's helpful. I'm sure you guys saw that a few weeks ago someone PDR subsidiaries replaced in the U.S. economic blacklist, which makes it difficult for me to purchase components from U.S. companies. So I'm wondering if you could just talk about any uncertainty that could create for your business in China or where is I'm not really a concern.
Right now thanks.
Well to be honest, we're still trying to understand the restrictions we don't sell to the haven't sold to the subsidiaries that were name.
And that that U.S. order.
And.
I think that the business that we have with them is still allow the I think as I understand it even.
It's an associated company you may have to get some sort of.
Export.
License or okay.
But we don't think it's likely to be immaterial impact on us relative to our business Mikael.
Okay, that's very helpful.
And I congratulation of course on the church in Britain, and what can you update us on the progress were thoughts on the use attacked by segments or is for kind of club patients outside of the research setting I know you would need regulatory clearance for ibds, but can sequels to currently support diagnostic applications.
Well, so arrangement with Barry that they plan on taking a several test on our system through the Chinese regulatory process and they're in the middle of that it takes a while.
In the case of.
The U.S. as I said, yeah, we do not have.
Doug.
F.D.A. registration of our system on the other hand, we have.
Several clinical entities.
Who are looking at the technology as a platform for key LDC type developments on their own obviously with our assistance, but but they would be responsible for whatever regulatory clearance within the a clear sphere that they need to do.
The surgeon is one of those we've talked in the past about our sales into the HL lay market, which is part of that's fair.
But there are others in different kinds of very targeted hard to analyze genes.
And with which our customers are working and some of that has been made public by them.
And as we get to a more formal relationships such as I'm sure Gen. We're likely to do joint releases on it.
Okay.
Okay, and then Mike you mentioned some of the population sequencing projects in your prepared remarks.
I was wondering if you just comment on what you're hearing or seeing some the larger ones like I know all of us starting to ramp back up can you just talk about some of that some of those projects, but come to mind.
So we announced a while ago, along with discovery life Sciences, and in Alabama associated with it it's an alpha group.
Just a patient with them.
In a structural variant pilot program.
As part of all of Us and so as I mentioned and I.
My prepared remarks. These are mostly at the pilot level and the Grand scheme of things right now as they start to understand.
How they begin to do something other than the short read.
Mostly snip defining.
Analysis of the all of one all about samples.
And so we take it seriously that even though it's a pilot it it has the potential for being a much bigger part of the program, particularly as we carry our programs for getting to the cost per sample down and getting the.
The number of samples that can be run on our system at a given period of time up.
And we think that combined because we do have a superior position. We think in terms of looking structural Bergen analysis, which is why we will pick for that.
But given.
The ability of the high five sequencing protocols that we have to now actually in many cases outperform short read sequencing even in the looking for single nucleotide variants.
We think that we're working towards a platform that is sort of a one stop shop for looking at all the variance and the human genome.
Good luck to do in terms of getting to the point, where we can do it at the cost required for that but we think we're well on the way towards understanding exactly how to do that and expect these pilot programs to.
To pay off is.
Getting us into a much bigger portion of that.
Really large scale population genetics market.
Okay and Thats.
Hi, there. Thanks, so much that's where the questions and good luck Susie.
Thank you.
Thank you and our next question comes from the line of Tyco Peterson with Jpmorgan. Your line is open.
If your phone on mute please UN mute Mr. Peterson.
Oh, Hi, sorry can you hear me this is Keith yachts or take a sorry about that.
My first question is about the academic and market about how many Uh huh percentage.
Customers that reopened there facilities in the quarter came from the academic and markets and then maybe just in terms of China, Dcs revenues and trying to stabilizing in Q3, given their response trip and then.
I mean been made.
The slowing but I think in general we saw kind of a broad based.
Shutdown.
Maybe a little less so in some of the government labs in the U.S. you, obviously had to stay operating but between both commercial and academic we saw a pretty good hit initially with companies being able to.
We're being forced to shut down either because.
You know if there were university. They were just closed or even if they were a company that at least had to retool.
To get there.
Safety protocols upgraded a little bit.
I think they both have come out back at probably the.
Same right.
In China, I think our business to some degree has stabilized I think.
It may evolve a little bit because they're putting now much more effort, we think into programs that are really related to human health.
Maybe more directly than than <unk>.
Really big focus in the plant and animal and the commercial segment.
And it's with the same customers, but there it's not that they're.
Expecting a decrease in business it may be changing a little bit the character of the kind of samples that get run, particularly with some of the big service providers there.
But what it to be honest, China came back before the U.S. and Europe came back.
They had the initial hit.
But you know they they got control the situation to a much greater extent then.
Certainly the U.S. did.
So they were able to to get back into reasonable operation pretty quickly.
Looking ahead in the last quarter was far more weighted to the U.S. in Europe.
Yeah, and it's been pretty stable.
Throughout the second quarter and even here in the third quarter in China. They even though there have been occasional flare ups here and there have co 19, it does seem to.
Be able to just continue to.
From our perspective.
Continue business as usual.
Got you. Okay, you got you alluded to it before which.
Hi, fives capabilities.
For research and Kobin immune response.
Could that serve as a meaningful tailwind maybe in the back half of the year heading into <unk>.
2021 sort of when things get back to normal if they do.
Well you know it all depends on what happens.
With the.
Development of vaccines, the development of therapeutic development of Prophylactics.
And what happens with the virus in response to those so.
I don't know that that we would expect in a short term a huge.
Impact one way or the other.
In terms of ability to increase business totally related to cope with 19.
Other than.
On the negative impact of people being shut down.
And hopefully that continues to abate.
And it's improved even since the end of June in that regard.
In terms of the number of sites that were just out no shut down.
Yeah.
But.
We'll see it it's it's.
Fairly driven by companies who are looking at.
The ability of the immune response to be augmented or to provide leads into the therapeutics.
And.
We don't control the pace of that to some degree so its more of a.
On opportunistic.
Ability of us to go in and make sure that we can provide them with the very best tool to study those issues and there are things that some more customers already done maybe that they do it at a slightly higher level, it's not those aren't really new applications for us.
Okay. That's helpful. <unk>, Oh, sorry, I'm, just thinking what Ed.
Is that even though you know it there's uncertainty certainly with.
The pandemic and how long is going to persist.
No as Mike mentioned earlier, there are quite a few significant.
Programs that have.
Sort of been put on hold and during this time period.
That involves pacbio sequencing.
Darling tree of life program, Oh that portion of the all of US program that we're participating in.
As we get into the second half of this year and then into 2021, we're pretty optimistic about how you know when those initiatives get back going.
That our business can resume growth and.
I'll just kind of repeat what I said earlier, we're optimistic about that and that's why we've we've added to our salesforce.
Yeah, I just add one more thing too just to reiterate something I'd said little earlier so.
As we've seen in in China.
Where people have.
No the governments have recognized a lot more the importance of.
I'm doing human biomedical research, particularly as it relates to infectious disease.
We we expect long term and as the funding for that becomes more available that people will switch over to things like that so you know co would die teens.
As a pandemic, but the virus.
Associated with it.
It's not likely to be the last one to cause problems. In fact, it's the third or fourth one of its class in the last.
16 years or so that's caused problems. This one because it's such an infectious agent has become the worldwide pandemic that it is but.
You know I think governments are attuned to the fact that this is this problem.
Just cobot 19 is likely to be with us for a long time and so I think governments are beginning to.
Maybe pay more attention to that hopefully as to how we're going to funding. So in the long term understanding how as humans, we respond to challenges like that and have the tools ready to do it quickly and be able to understand what it is you need to look for to solve the problem.
Is likely to be an upside for anyone in the biology business, including us.
Got you that's helpful. Thanks for the thanks to the color.
Maybe just one last quick one on margins.
How are you guys able to sustain gross margins in the quarter and what gives you confidence that you will see the same level that you saw in Twoq and Threeq you. Thanks.
Yeah, So gross margin a quite frankly was.
You know significantly lower in Q2 than it was in Q1 Q1's, 48% in Q2 was 39% Melanie I.
As I mentioned the main reason for the decrease as we had.
You know fixed overhead.
That was recognized period costs and the in the in the quarter and the way that works is that overhead is sort of continuing to be on their balance sheet and that's why in the third quarter I mentioned that we expect gross margin to be similar sort of level.
You know as yes, you know revenues increase in our production increases we'd expect that gross margin to a ton increase and.
And so you know three 9% represents a sort of a lower level of gross margin all other things being equal.
Yes.
Okay. Thank you.
Thank you and as a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press star in the number one.
Our next question comes on the line of Stephen miles with Piper Sandler Your line is open.
Great. Thank you thanks for taking the questions.
So a follow up question on a Adair surgeon announcement, you mentioned that you're gonna be doing joint releases press releases with the search and.
Maybe you can give us a little bit more color on the collaboration is just the joint venture or R&D share co development, maybe he can give us a little bit more color.
Maybe I misspoke, what I, what I thought I said was that we planned on on perhaps doing other kinds of releases as we.
And now its collaborations with other companies like US your engine.
I know I'll, let you look at the press release to see the details of what they were comfortable about saying that they were working on.
Yes.
Okay got it.
Okay understood and can you give us a sense of timing with the surgeon cooperation I know, there's these guys had been been selling the excellent.
Genetic test for some time and are considered experts there now.
It would you be able to get some timing on when you'd be able to you know really some some touched some sequel.
Well again, that's up to them and what they they take its their regulatory approval process and so forth Oh, although we let them okay. So.
Yeah, Okay, no nine of the timeline on that.
Okay, and if they research collaboration it's not a joint venture.
Research collaboration Okay, perfect. Okay, and then a another question on different topic on consumables, so and other consumables were lighting Q2, and just a question more relating to that meets the shelf life of the reagents that people have in their lives right now should should we.
Should we expect that consumables jump in Q3, as Ed said reagent start to hit the ended their shelf life or maybe can you give us a sense of what do you guys are thinking.
Yes, yes. The this is Ben the.
Shelf life isn't too much of an issue people don't tend to keep that much a inventory on hand, they keep a little bit.
And what's going to drive the consumable growth is the utilization.
And as Mike mentioned utilization on the sequel to in particular.
You know returned to a level in June.
Those are similar to where it was before the pandemic. So we're optimistic about that.
Oh, it's it's not a 100% in terms of what are the sequel. One is you know that's actually still lower but.
Overall, the growth in utilization driven by the sequel to.
Should drive sequential growth in consumable revenues in Q3.
Okay, Great. That's helpful. And then a final question a it's a question about lab budgets.
Do you think.
Theres going to be a deferral of 2020 lab budgets into 2021 or do you think labs will start to spend their dollars by December 30 Onest.
[noise] Oh, that's obviously going to vary all over the over the place I think that that certainly there was sort of two factors that.
I've been in play.
One is that people were shut down that means or purchasing departments were shut down and so that sort of delayed orders in progress and hopefully as they get open as long as they've got the money already committed in available.
That will work itself out I think there are certain places where priorities have shifted.
And so people are having to rethink what they're going to do with like capital equipment that they want to purchase or even big consumables projects.
And that that varies some sites for wind up getting more money him in their proposals for some of the budgets for next year that have big increases for places like NIH and the CDC.
Some of that we'll be spending and sequencing research.
And then there are other places where.
You know if.
People were a little nervous because of their overall institute or institution finances that they they may have to postpone things and.
Right, it's just really hard to figure that out in terms of its short term impact versus its longer term impact right now.
Oh.
Okay that makes sense I guess.
One of transit, there's pluses and minuses in there and that's what the balances the little unknown as.
As governments are responding to their budget priorities in different ways and it different rates.
Okay that makes sense. Thank you.
Operator, I think we have time for one last question.
All right. Our next question is kind of come from the line of Doug Schenkel with Cowen Your line is open.
Hey, guys. Thanks for taking my follow ups so arm.
Just a couple keeping in mind that we know you're not providing guidance, but I want to talk for a couple of quick observations from the model just make sure we're thinking about things right moving forward.
So starting on instruments I believe you place.
I think you said 23 instruments in the quarter on it sounds like you didn't view this as a catch up a quarter and if anything that's equal to placements were still a bit under pressure. Even note you got a lot better than where we're entering the quarter.
Assuming there isn't a material resurgence in coated 19 over the balance of the here is it fair to assume that instrument revenues should increase from here Q to Q and then on the considerable side. It sounds like you did about $4 billion and consumable revenue in June on based on what you start here into July.
You know keeping in mind your prepared remarks on pacing.
Again, assuming there isn't a reversal in lap opening trends seem that monthly exit rates works here for the full current quarter as good a guess as any as we update our model. Thank you.
Yeah, Doug ill try to ticket in reverse order there so.
On a consumable.
[music].
Yes, I just mentioned previously we should see sequential growth.
From Q2 to Q3 and consumable.
Especially mentioned.
A june represented almost half.
The total for the quarter.
And yeah, you know there's been a few more openings in July since the end of June so hopefully that's going to translate into a more growth, we'll we'll see about that.
With regard to that the instrument revenues.
You know that that was a harder one to call.
We mentioned that there's still headwinds certainly out there the pipeline is healthy but.
No. The the comments were making before about some customers being conservative about capital dollars.
You know has them either postponing.
To later or you know Showtime, that's not yet even determine when they're going to spend that capital. So I think thats still has to play out for a while longer before we can actually call.
Very well, what's going to happen with capital sales.
Okay. Thank you again.
Thank you and I'll now turn the call back over to Mike Hunkapiller for closing remarks.
Okay well.
You know somebody earlier saw that kind of we my Thunder here, but as.
Noted.
Sometime ago. Susan is retiring this is actually her last week, Oh, Oh at the company.
And you know personally since I've been in the company's CEO Susan has absolutely been.
As important it's an employee as we have should not only as the chief financial officer has been but she's been in charge of several other groups from manufacturing and I T and and so forth during that time and I've always consider as sort of the the unofficial chief operating officer has occurred.
And in that regard.
So I wanted to add Mike Yeah. Thanks to her for the stellar work that she's done throughout her whole.
[music].
11, your career 12 year career at.
The pack bio and which we're very well.
Yes. She spends this has been more time and Carmel.
In the meantime, just to make an official so then well we're working for recruiting I permanent CFO.
As being appointed by the board as interim Chief Financial Officer.
And he made them okay.
I want to make a comment about about that from his perspective.
What we're looking forward to being able to take advantage of his experience with the company as well.
You know stay tuned for an announcement on a permanent replacement, but ER in the meantime, he will be serving.
In the role that Susan has played a big part of.
Great. Thanks, Mike I don't have anything else to add.
So with that thank you for joining us and we look forward to talking again and pretty much time.
Ladies and gentlemen. This does concludes today's conference. Thank you for participating you may now disconnect.
[music].
[music].