Q1 2021 Pacific Biosciences of California Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Pacific Biosciences of California, Inc. First quarter 2021 earnings conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
And I ask a question during the session you will need to press Star then one of your telephone. Please be advised that today's conference may be recorded if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Todd Friedman and director of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to the Pacific Biosciences first quarter 2021 earnings Conference call.
Earlier today, we issued a press release outlining the financial results, we will be discussing kind of today's call a copy of which is available on the investors section at our website at www Dot <unk> dot com or as furnished on form 8-K available on the Securities and Exchange Commission website at Www SEC Gov.
With me today are Christian Henry President and Chief Executive Officer, Susan Kim Chief Financial and financial Officer, and Mark and I know and Chief operating officer.
Similar to last quarter, we are hosting our call from a number of different locations. So please bear with us if there are any technical issues or policies.
Before we begin I'd like to remind you that on today's call, we will be making forward looking statements, including providing predictions estimates plans and expectations and other information you should not place undue reliance on forward looking statements because they are subject to assumptions risks and uncertainties and may differ materially from actual results.
These risks and uncertainties are more and more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission, we disclaim any obligation to update or revise these forward looking statements and.
In addition, please note today's call is being recorded and will be available for audio replay and the investors section of our website shortly after the call and.
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 I'll now turn the call over to Christian.
Okay.
Thank you Todd and good afternoon, everybody. Thanks for joining us today I'll start today's call with an overview of our first quarter results and business highlights and then Susan will provide some more detail on the financials and some thoughts regarding the second quarter.
<unk> had the strongest first quarter in its history delivering record quarterly product and services revenue of 29 million in the first quarter and increase of 86% compared to the first quarter of last year.
Revenue also grew 7% sequentially and XP exceeded our expectations.
The strong quarter was driven in part by record sequel to and to eat placements as we delivered 41, new sequel, too and two way systems growing our installed base of 244 units as of March 31st.
Our new placements included 10 sequel, Twos, and 31 sequel to lease two quarters into the launch of the sequel to we we continue to be pleased with its reception and through new purchases and instrument upgrades about a third of the sequel to installed base is now since to eat.
Sequel to lease reduced data footprint with its an instrument data processing and I and cloud enablement combined with our industry, leading hifi sequencing are enabling us to reach a broader customer base in fact, roughly one quarter of sequel to ease placed and the first quarter, where new pack.
Bio customers. These customers include a pharmaceutical company using the system for in house development associated with an AAV gene therapy vector and bio tools, our first sequel to the service provider and Taiwan, who plans to use it and sequel to me for 16 assets.
And ex among other applications.
We also install of the sequel to Weird Queen's University Belfast, The first pack bio instrument on the island IL Islands of Ireland, where research is expect to use highly accurate long reads and human whole genome and plant and animal genome research.
Several multi system installs also drove record sequel, two quarter as existing customers scale to address the diverse set of sequencing applications. For example, we installed multiple units at Labcorp to support its contract with the CDC to sequence positive Sars COVID-19 two cases.
And the U S.
And the first quarter lab core represented about half of all CDC related G. SEC submissions. This led to COVID-19 surveillance related revenue and the first quarter and the low single digit millions.
We are pleased with the by the administration's recently announced plans to invest $1 7 billion into a national network to identify and track Corona virus mutations genomics will be at the heart of this endeavor and these congressionally improved dollars will expand the government's genomic sequencing efforts while also.
Also creating critical research partnerships under a consortium called the centers of excellence and genomic epidemiology.
We stand ready to support everyone involved in this critical work.
We believe our technology is uniquely positioned to build of surveillance foundation to better prepare for future pathogen related health crises.
Our flexible and scalable protocols can be used not only and Sars COVID-19, two but for surveillance and influenza HIV hai's food borne.
And pathogens community antibiotic resistance and strained level identification of microbes and complex samples.
Finally, with respect to COVID-19 and consistent with our strategy to simplify our workflow for customers. We are developing of fully kitted product for COVID-19 surveillance, which we expect will be available later this year, we intend to leverage the development of this kid to offer a suite of best in class solutions for.
For infectious disease surveillance as we believe this will be an important area for the company and the future.
We also developed them and we also delivered of multi system order of sequel to lease at the Wellcome Sanger Institute in the first quarter related to the Darwin tree of life program, and very genomics and China ordered several systems to expand its sequencing services, including the launch of its Dallas EMEA of gene Atlas.
Clinical trial program.
Instrument revenue grew sequentially across all regions with Pac buyers, Hi, Fi accuracy driving of competitive tender win and the U K for neurological disease research and we book the first equal to system in Italy, and a new University core lab.
Moving to consumables first quarter revenue was $10 4 million up 3% sequentially from the fourth quarter of 2020 of 25 per cent compared to the first quarter of last year and well ahead of our expectations for.
And what impacted by the lunar new year and February however, the recent growth and system installed and robust utilization among service providers and China more than offset this impact further we saw increased utilization on the sequel to and TUI systems, and fact utilization levels on the existing installed.
Of instruments were at record highs.
And particular, APAC and China contributed to our greater than expected consumable quarter as service providers continued to work through a backlog of projects spanning human structural variation projects for rare and narrowed to degenerative diseases plant and animal research and met of genomics.
We are proud to support these and other customers like discovery Life Sciences, who has started sequencing for the Gabrielle and Miller Kids first pediatric research program.
Aiming to create a large scale database of clinical and genetic data from patients with childhood cancers and congenital disabilities.
Discovery Life Sciences also expects to start sequencing for the NIH is all of US research program soon with samples already in house.
As I've said on prior calls one of our key strategies is to invest and our research and development pipeline to both accelerate our current programs and to develop the ability to take on more projects during the quarter. We made significant progress in this area. For example earlier. This week, we released our latest Hi Fi protocol and <unk>.
Software update the newest product update enhances our leading long read chemistry, with even more hifi reads at or above 99, 9% accuracy.
Additionally, the new chemistry streamlines, the sample prep process, allowing labs to scale to sequence hundreds of thousands of human genomes per year, perhaps most importantly, this opens up hifi sequencing to more sample types, such as volume limited blood tissue and cell lines as <unk>.
We've been able to reduce the DNA input requirements by threefold.
The broader and more flexible sample specifications can drive hifi sequencing into more projects and more applications.
Turning to our collaboration with and V. Today, the first quarter was a solid start to our multiyear development part of the partnership.
Work is already commenced developing the ultrahigh throughput sequencer that we believe will deliver a highly accurate long read genome at substantially below $1000 per genome I'm pleased to report that the teams are working extremely well together and have made substantial progress on aligning the key development milestones and product.
And.
Meanwhile.
Utility for Pacbio long read sequencing is already demonstrating success with our collaboration with children's Mercy, Kansas City, one of the nation's top pediatric medical centers in the first quarter children's Mercy added force equal to lease to its fleet and increase their whole genome sequencing output to help improve solve rates.
For families and children living with and diagnosed rare diseases.
Searchers at the hospital are already finding that hifi sequencing demonstrates higher sensitivity and specificity than short read of genome sequencing and can identify more rare variants per genome than other technologies.
As we continue to invest and these clinical collaborations researchers around the world are using pacbio sequencing to elucidate the genome and its relationship to human health and disease. For example, researchers at the University of Washington, and the Mayo Clinic published studies using Pacbio sequencing to discover.
And characterize complex pathogenic variants likely associated with ALS or Lou Gehrig's disease, Hifi sequencing deciphered these variance and highly repetitive regions of the genome areas that cannot be accurately represented using other sequencing platforms.
Also this month researchers at nationwide children's and the broad Institute published cases, using pacbio sequencing to find pathogenic complex structural variance and childhood cancer and of rare genetic blood disease in both cases researchers explain the limitations short read sequencing had.
And detecting these variants.
Similarly, another recent study published in the journal of Science use pack by of Hifi sequencing to assemble 60 for haplotype from 32 diverse human genomes and uncovered over 100, thousands of structural variants and which over two thirds went undiscovered by short read sequencing.
These studies clearly showed the potential for hifi sequencing and human genome applications.
But our technology also remains critical and plant and animal research yesterday and <unk>.
Magnus magazine released its special issue highlighting research papers from the vertebrate genome project and consortium targeting to complete reference genomes for all 70000 known vertebrates as the flagship paper outlines. These complete genomes are fundamental and apply and genomics and biology disease and bio.
Diversity conservation further the authors confirm the use of long reads as of central for maximizing Geno and quality. The Verde vertebrate genome project model is also inspiring other large scale of sequencing initiatives, including the Earth buyer genome project, which aims to decode the genomes of all.
You carry Arctic species within 10 years.
And we're just beginning to scratch the surface of the potential applications that long reads can address for example of Preprint study earlier. This month showed the incredible performance and potential for Pacbio sequencing in single cell genomics long reads once thought to be off limits for single cell genome seek.
Good thing because of the throughput and input requirements could eventually be of differentiated method and understanding complex genetic variation at the single cell level.
Turning to our organizational updates, we made great progress and expanding our team we added six quota carrying sales reps and the first quarter. In addition, we filled another six sales reps physicians with second quarter start dates including of general manager for EMEA and a country manager in Japan.
And both of these leaders have deep experience and our space and will be instrumental in driving our expansion strategies in Europe and APAC, we are well on our way to doubling our number of sales reps and the field. This year from the 22 reps that we had at the end of 2020.
We also completed and marketing of the organization to better align our team to specific applications and champion the voice of customer into our product development process.
We also announced Doctor Hana Valentine as a director nominee for election to the board of directors and our annual meeting Dr. Valentine will bring decades of experience is of professor of medicine at the Stanford University Medical Center and as the NIH Chief Officer for scientific workforce diversity I look.
Forward to the leadership and expertise will bring to our growing organization.
Finally, while Doctor, Mike Hunker pillar will not stand for reelection to the board of directors. He will continue to be an adviser to the board and an important partner for me as we continue to push our technology forward I'd like to thank Mike for his contribution and his leadership over the past decade, and his role and transforming long read sequencing.
Technology to where it is today now I'll turn the call over to Susan to discuss the financials Susan.
And.
Thank you Christian as discussed we achieved record revenue and the first quarter of 29 million, which represented an increase of 7% from $27 1 million and the fourth quarter of 2020, and an increase of 86% from $15 6 million and the first quarter of 2020 and.
Internet revenue and the first quarter was $14 9 million and increase of 10% sequentially from $13 6 million and the fourth quarter and more than triple the instrument revenue of 4 million recorded in the prior year quarter.
We delivered 41 equal to and sequel to eat systems. During the first quarter growing the installed base to 240 for system as of March 31.
Roughly three quarters of these shipments were equal to meet demand.
We also had over a dozen customers upgrade to sequel to eat from sequel, two and the first quarter, representing approximately 500000 and revenue.
Turning to consumables revenue of $10 4 million grew 3% sequentially from 10 million and the prior quarter and was up 25% from $8 3 million and the first quarter of last year.
And the growth and consumer revenue reflects increased utilization and our growing installed base of sequel to you and to meet system.
We also continue to be pleased with the increase and genomic data coming off of our sequencer and this underscores our customers expansion of Pacbio sequencing.
And the first quarter alone equal to and <unk> generated over 1.7, Petabytes is which is more than all of the data generated from sequel and is equal to sequence. There's combined for 2015 through 2019.
And particular, APAC and China strength contributed to first quarter of consumable revenue exceeding expectations.
Service providers and the region continued to work through a backlog of projects, which resulted in record levels and system utilization and helping to offset the traditional softness from the lunar new year.
Sequel to and QE consumables represented approximately 82% of our total of our total consumable shipments and the first quarter with the rest from older system.
We continue to expect the proportion of consumable sales for sequel systems to grow as the installed base for these systems expand and customers migrate to our new platforms.
Annualized total revenue per stick them on the sequel to installed base and the first quarter exceeded 165000, and there was minimal impact related to COVID-19 delays and the first quarter.
Annualized pull through revenue per system was down sequentially as expected due to consumers stocking orders from customers in Q4.
Finally service and other revenue grew to $3 7 million and the first quarter compared to $3 5 million and the prior quarter and $3 3 million and the first quarter of 2020.
Our service revenue growth reflects the growing installed base of sequel to me.
Moving to gross profit first quarter gross profit of 13 million represented a gross margin of 44, 8% compared to gross profit of $11 4 million or 42.0% in the fourth quarter of 2020.
The sequential increase and gross margin was primarily due to higher volume, which improved our factory utilization.
Year over year gross profit grew $5 5 million or 73% driven by the growth and revenue with growth margin of approximately 3.2 points lower primarily due to a one time benefit related to inventory of reserve releases in Q1, and 2020 and higher stock based compensation expenses.
And Cogs and the first quarter of this year.
Moving on operating expenses were in line with our expectation opt.
Operating expenses and the first quarter of 2020 total of $46 7 million up 32% sequentially compared with $35 4 million and the fourth quarter, and 16% higher than $42 million and the first quarter of the prior year.
The increase in operating expense compared to the previous year and previous quarter was a result of increased R&D expenses related to new product development and an increase in SG&A expense for the growth and our commercial team and higher noncash stock based compensation expenses.
As a reminder of the first quarter of 2020 included payment of of 6 million advisory fee incurred in conjunction with the termination of the merger agreement with Illumina.
In terms of headcount we ended the quarter with 435 employees, including 28 quota carrying sales reps and added head count across R&D marketing and service and support functions.
Non cash stock based compensation included in operating expenses with $9 2 million and the first quarter compared to $4 8 million and the prior quarter and $3 5 million and the first quarter of 2020.
Other income and expense and the first quarter reflects a 52 million expense related to the repayment of continuation advances to illumina due to our 900 million convertible note financing earlier in the corner and.
Additionally, and includes a partial quarter interest expense associated with the convertible notes of approximately $1 8 million.
First quarter net loss was there for $87 4 million and net loss per share was 45.
And that's a net income of $74 9 million and net income per diluted share of 37, and the fourth quarter of 2020, and and net income of $1 3 million and the first quarter of 2020.
As a reminder, net income and the fourth quarter of 2020 included a 98 million one time gain associated with the reverse termination fee we received from Illumina.
Net income and the first quarter 2020 had a 34 million gain associated with the continuation advances received from aluminum.
We don't expect to recognize any gains or losses related to the aluminum merger termination and the future.
Now turning to our balance sheet. We ended the first quarter with 1.16 billion and unrestricted cash and investments compared with $319 million at the end of 2020.
The increase in cash and investments was primarily a function of the $900 million and gross proceeds from our sale of convertible notes to softbank and $22 million and proceeds from the issuance of common stock through our equity compensation plans.
Really offset by the $52 million payment and to alumina and $23 million cash use and operation.
Inventory balances increase and the first quarter to $16 3 million, representing a 4.2 inventory turns compared with $14 2 million at the end of the fourth quarter of 2020, which also represented for point to inventory turns.
Accounts receivable decreased and the first quarter of $12 9 million, reflecting of DSO of 46 days compared with $15 8 million at the end of the fourth quarter of 2020, reflecting of DSO of 49 days and the decline in accounts receivable and improvement in DSO compared to the fourth quarter were primarily a function.
And of improved revenue linearity.
Moving to guidance for the second quarter of 2021, we expect revenue to be approximately flat to modestly higher than 29 million reported and the first quarter of 2021.
We expect gross margin to be roughly flat compared to the 44, 8% reported and the first quarter of 2020 one.
We expect operating expenses to grow sequentially to be and the most of <unk> million, representing a continued investment and R&D and commercial infrastructure.
As a reminder, as part of the terms of our convertible notes, we expect to incur approximately $3 5 million and interest expense every quarter going for it until maturity or conversion of the notes, which represents one 5% interest per annum and amortization of debt issuance costs.
Finally, our accounting treatment related to the and VK collaboration will be recognized as previously communicated with funding from and Dk recorded as a liability under deferred revenue.
The liability may be amortized to revenue and later periods as we sell of the developed products for Enrique per our agreement are released when other performance obligations are delivered or contingency block.
And the first quarter, we received approximately $4 1 million and try and VK related to our collaboration.
We will record expenses associated with and detail on our P&L as incurred which we continue to expect to be between 20 and $25 million for the full year 2020 one.
Price is recognized and R&D related to our collaboration and the first quarter were approximately $1 1 million.
With that I will turn the call back to Christian Christian.
Thank you Susan.
When I started as CEO back in September I set for three key strategies that I believe will drive growth and Pac bio and the <unk>.
First core strategy is to expand our commercial footprint throughout the globe. This new footprint will help us reach more customers and helped drive benefits of high face hifi sequencing into the community.
Over the past several months, we've made substantial progress in this area, including the hiring of new commercial leadership and expansion of our sales force, we are well on our way to more than doubling our sales force, which is already helping.
Helping us reach more customers than ever before.
It's essential that we expand our capabilities and product development. So that we can build the multi product portfolio that gives our customers flexibility on how they leverage the power of lack of sequencing, we're making strides in this area as well we know of several programs and progress which are designed to improve the throughput of our seats.
<unk> drive the cost of hifi sequencing down and greatly simplify our and Dan workflows.
These advancements advancements will make hi fi more accessible than ever and will power our growth.
Finally, we believe that whole genome sequencing will be an essential tool that clinical researchers will use to understand and treat disease. We expect that highly accurate cost effective hifi reads will truly enable this market as a result of core strategy is to continue partnering with leading institutions such as Chile.
Arens Mercy of Kansas City, and then V day to develop solutions that demonstrate the power of highly accurate long read sequencing using hi Fi to enable this opportunity and.
In closing we're off to a strong start for the year during the quarter, we achieved record product and services revenue expanded our gross margin and I'm encouraged by the progress we've made against our core strategies that I've outlined.
I want to thank our customers employees and partners for their support and I look forward to updating you on our progress next quarter with that I'd like to open up the call for questions.
Thank you as a reminder to ask a question you would need to press Star then one of your telephone to withdraw your question. Please first of pound key.
Our first question comes from the line of Kyle Mixon with Cantor Fitzgerald. Your line is now open.
Thanks, Hi, guys. Thanks for taking the questions and congrats and this nice quarter here.
Thanks kind of warm I'm sure.
Sure.
Wanted to start with I guess, that's why of course, so 50 of thing I heard this right 50% of all D. G said.
Submissions and the first quarter, so would that kind of imply that you're taking that share from Pac bio platform sequenced cobot samples was close to that or I mean, we just want to understand how to think about.
The share from Pac bio and the last couple.
A couple of months can you help can you help us kind of get to that.
Or at least Directionally.
Sure so.
Right now of that core is using pack bio for all of their.
COVID-19 surveillance sequencing so that's.
So that's indicative of what what Labcorp is doing is indicative of what we are percentage.
Of course on a global basis, we're still a.
A small percentage of the total.
Total surveillance, that's going on but our shares increasing because sequencing and the U S is accelerating and you know in fact labcorp plays a significant role and that so we see we see the opportunity to continue to be growing for us.
But as of March 31st our data suggests half of the GSA of data in.
And in a in U S was based on Labcorp, which is essentially ours.
Got it and the.
41 placements was impressive and you called out of few lumpy I guess wanes and the quarter, but could you just kind of speak a little bit more to what labcorp represent represented and maybe what can be day, possibly represented.
And if at all and then.
Sanger has completed their third and social and the quarter, but just any any other large multi tool order as you mentioned a few but was it generally pretty.
Was there any like huge.
Orders are just a few there that had.
Some of them share there.
Alright, let me highlight the Yeah go ahead go ahead, Kyle for you want to add the adjusted Chip just sorry for that question just trying to think about the sustainability of this 41 number as we go into the second quarter and beyond.
Yeah, I think that's a good that's exactly the point I think with respect to COVID-19 for example lab for several more systems and so that revenue would be.
One time infrastructure and wouldn't repeat in the second quarter, but we did have several multi system multi unit system orders.
Around the around the World, we highlighted lab core we highlighted that Sanger.
I think there were some in Asia as well and so I think our business is.
We definitely have.
Some multi unit orders, helping us and Q1, which helped the over performance and as we expand our sales force.
And that should help us cover.
The ones and Twosies, but also continued to drive multi unit orders into the future and so it's.
And of our balance from quarter to quarter as we grow here, how and how to think about system placements, but yes, you're right. We were we were very happy with the number for Q1 I do think it shows that the sequel to we was really an important launch for the company and and I think that.
The growth in sequel to replacements of sustainable and it's something we're shooting for.
Perfect that's helpful and the international.
Orders and kind of wins this quarter were were solid and that's an area of that <unk> wasn't as strong and.
In the past right and so I'm just wondering if the recent expansion of of the commercial team has paid any dividends. Thus far I know I know it's pretty early.
And <unk>.
A few handfuls of reps, but how is that taking share how does that benefit kind of taken shape, just yet and what are you kind of expecting a few quarters out from from that team internationally speaking.
Yeah, I think I don't know how much the actual new reps are really contributing as we've talked about in the past.
It takes a few quarters to get people up to speed, but what has happened is.
And particularly in Europe, we really have some great folks on the ground there and now we're starting to see an acceleration. So we added reps for example, in Germany, and our our sales leaders baked and the U K and he is really driving drew.
Driving business of cross across the region and so I didn't get in the quarter average, especially pleased with how how EMEA really started coming together and I think it will only improve from there now that we have.
A very intense focus on the infrastructure and then adding the people Asia continued to perform exceptionally well as I've said on and my prepared remarks, how we're always worried about the lunar new year, and how that was slow of business down, but but the APAC team really helped the <unk>.
Service providers.
Keep their machines going in and driving helping to drive demand there and so we saw nice growth we hired a country manager who started now in Japan. So that will start building out that you know that Japanese.
Infrastructure, which basically have none.
And so we're at the point, where you're just starting to see the low hanging fruit and the opportunity and my my belief is that as you get into the back half of the year and we get we continue to build this team it will help us drive our growth.
That was great. Thanks, and thanks for the question.
One last question for me I guess.
Regarding the plans for the sub $1000 genome and the next five years, you mentioned that the plan is I guess and the works to kind of get through put up and costs down.
But is there any like specific range.
Range that for threshold, even though you've kind of caught up and we think that payers will reimburse I ask this because a competitor announced about a month ago continue to reduce costs to the what's called the $500 range or so for clinical customers and obviously you'd have a key without price points of curious your thoughts around that dynamic.
Well I mean, I do I do believe that that price.
This will be important to payers, but will be more important will be value and if we can come to market with a solution that provides more value than I think we have a better chance at sustainability of price, whether that's at $500 or something slightly above $500.
But I do think as we've been saying for the last few quarters here, we believe our solution will drive a substantially below $1000.
And we believe that that customers are willing to pay.
Somewhat more for a more complete more accurate genome, particularly when it's in a clinical setting and and having a complete view is so critical to managing the outcome of a patient and so.
I'm I'm actually very encouraged about the progress, we're making on the R&D side too.
To enable that that promise, but I think structurally and the market. When we get these products to market, we will be very competitive and I and I think it'll be compelling.
Yeah, and this gives me a lot of enthusiasm during that this week at the rare disease of and I know you guys for hosting that.
So I'll leave it there thanks for taking my questions and congrats again.
Thanks, Kyle appreciate it.
Thank you and your next question comes from the line of Doug Schenkel with Cowen. Your line is now open.
Hey, good afternoon, thanks for taking my questions. So.
Combining Q1 revenue with what you talked about Directionally for the second quarter. It looks like you're targeting just under $60 million and first half revenue.
If we back that out of where consensus is for the year.
Yeah. It looks like you would have to generate $75 billion and the second half or so to get sort of the street numbers.
Does that seem reasonable and I know you at the beginning of the year. So do you expect it to be.
More back end loaded this year, but it's that type of ramp ex.
Festival in your mind does that makes sense and if so what are the key drivers to kind of bridge that and then some of that is gonna be normalization of pull through for instrument on of growing installed base, but I'm wondering.
Specifically, what youre expecting and that construct from things like surveillance testing.
And as well as pop Gen contributions.
Yeah, Doug Thanks for the question and it's a good one and I think.
Conceptually if you do the math, you're exactly right as my expectation is that the back half is stronger than the front half with respect to the ability to grow and and why do I feel that way I think first and foremost is regeneration and activities that are going and I'm now are at all time records for the.
Our company and so we have put and pretty intense focus on and on these earnings calls we talked a lot of about the sales reps, but we've also invested a lot in since I started back in September on formalizing and improving our processes for lead generation and.
Defining how to how to reach out and communicate with customers and so there's so much more to a sale than just <unk>.
Just the sales rep.
And being out there and so whats encouraging to me is I see that we're achieving record levels of of lead generation of very significant numbers of lead leads coming in and.
The objective of course is to get those through the funnel and out in and out of and executed on areas, where I think we will see growth I do think surveillance will continue to be and opportunity for us and as you heard on my prepared remarks, we're going to we're going to develop a kit for COVID-19, which I think is is it.
A really big deal for the company because historically the company hasn't developed kitted applications and so.
As part of our strategic planning and thinking.
We have of thought carefully about okay. We believe we believe viral surveillance of pathogen surveillance will be of market for us long into the future. So let's start by getting of COVID-19 kit out there and develop that core competency. So that we can we can leverage that capability or.
We're not just this year, but next year and into the future and so I know that's not exactly on your guidance numbers, so to speak but but those are all important components of how we drive into the market and the other piece is I.
I do think there are significant opportunities in Europe, where just I mean.
And as you heard we just we just shipped our first system ever into Italy.
Just to put it and perspective now Italy is not the biggest country in Europe, but it just shows you. How early we are in our commercial ramp relative to.
Relative to our peers and and.
And so.
As we build out and structure of these territories and and drive the discipline of our commercial operation.
That will help us accelerate pushing things across the goal line sooner and I think will help drive our growth.
Hey, Doug.
Oh, sorry, and wanted to add a couple of comments.
And two relate to and what Christian was saying so.
So I think one of the things that we saw in Q1, which was great for US was the interest of customers and the sequel, QE and Christian had mentioned and then we also had some high profile of multi instrument orders.
And from customers and I expect to see some of that throughout the rest of the year.
The timing of which quarter to quarter can vary, but we do have a good pipeline of multi instrument orders.
Some customers and so that's very promising the one thing that you have to keep in mind, and we are ramping and investing and the commercial organization and cakes.
Usually it takes up to two quarters for a sales rep to become productive and then theres still the time to close orders as well and we then.
And some of our markets and it can take longer to close and orders so anywhere from six months to even 18 months and so that also needs and flow through and we're investing and as Christian mentioned, we're investing in marketing.
Generating more of these and so we're certainly and building the infrastructure to accelerate growth of it of long term, but quarter to quarter. There is some variability and exactly what that looks like.
And then 2021, and it's still a little bit variable and it's the reason we didn't give guidance for 2020 one.
Okay understood Susan just one very quick follow up on part of what you described.
And I know I think of at least and partial response for the last question you talked about a few.
Voltage order placements and the quarter.
Is that why the ASP for you was a little bit lower per.
And for the instruments relative to the second half of last year and if so is the expectation that the ASP per instrument normalizes back to the second half of the year levels. As we book ahead over the balance of the year.
Yeah, that's a very good question, Doug So volume and and Asps are certainly what what impacts our gross margins and as you had noted sometimes when we have multi instrument orders from customers. The average ASP for that quarter can be slightly below our total of average on a run rate basis.
And I had mentioned earlier, we still anticipate that we're going to have more multi instrument orders.
So that's going to be probably the highest variability quarter to quarter in terms of average A&P. So do I think that Q1 with all of the multi instrument orders in the year and I know, we're going to see more in 2021.
Okay.
Doug at the end of the door.
Yes, Doug at the end of the day, we I do think Asp's will fluctuate a little from quarter to quarter.
And we're probably somewhere between where we were in Q1 and where are we where we were in the back half of last year. You know the strategy here is to drive the installed base and and that's either that's through multi unit orders or Singletons and the reason why that's so critical of course is to get everyone running consumables.
But also.
Really pushing hifi chemistry, so that we develop new applications and so it's part of a broader strategy on how to not only to grow the top line, but to grow the application capability and create that snowball effect over the next several years. So that's how to think about it I think yes notes and notes totaling.
And I apologize for a step and audience there are little bit Christian, but I was going to kind of say the same thing.
If you got it and make a slight tradeoff on the SP X.
Screens for for multi unit placements and getting more of instruments out there.
And that's more than an acceptable credit off I would think.
Maybe last one before I hand, it off to others.
And as you've mentioned earlier on this call and whats kind of of point of emphasis on the last quarterly call.
Do you have well over $1 billion and cash on the balance.
A lot of that came from.
Softbank via their 900 billion dollar of investment and that that was positioned to really accelerate growth initiatives for the company the investment of <unk>.
And having a strong balance sheet puts you in a good position to be a little bit more nimble and.
And maybe a lot more aggressive.
Is there anything more you can share at this point on strategic priorities and.
And lives.
Reasonable timelines with wide error bars of course are where.
And where we may hear more for you on what you of what.
Essentially the follow through on the cash of raised.
Yeah, No. That's for that's a good question, Doug I think right now what we've done in the very short term rate is number one we've accelerated.
Even further our commercial initiatives for 'twenty, one and that that means pulling all of the hiring for word that means pulling of star.
Starting to really seriously evaluate real infrastructure in Europe. So we don't have any we have no facilities, we have no.
No warehouse space or anything like that and Europe, right now and and the truth is if you want to really grow and Europe, you need to look European and you need to be able to.
Have local warehousing and local.
Local application labs, and things like that where you can you can get much closer to customers and so the first thing is is.
And of the blocking and tackling associated with with some of that expansion and we will use some of that will use some of that capital. This year on that and now those are reason that relative to the $1 billion of course that small and the second is.
<unk> is focusing on on driving the R&D.
Portfolio now we've been fortunate that that arrangement and we set up with and VK.
And they are paying for most of the development on the on the new.
A new platform for them.
But.
But we are accelerating spend around the edges, particularly in and around the workflow. So we're very focused on sample prep and and trying to create end to end solutions and create the ecosystem ecosystem, that's really going to drive growth over the next five years. So then the last part of course, which is the part of your prop.
And most interested in is kind of looking at external opportunities and whether that's of whether that's collaborations or partnerships or acquisitions and and we are evaluating lots of different opportunities is as I've said before I think they'd come into two different camps.
First campus kind of horizontal in the sense of thinking about are there are there assets out there that we can use we can.
And we can acquire or collaborate or partner with two fundamentally give us competitive advantage or or create growth opportunities and the front end.
And I think that we're knee deep in evaluating and lots of those different kinds of opportunities and then also the other side of horizontal of courses is are there informatic opportunities.
You know in the past, we've been very successful at that and.
Integrating.
Informatic type of opportunities to kind of round out the product portfolio and there's adjacencies and that we're looking very carefully and are there are.
And our objective is to be the world's most advanced.
But so solutions company for biology, and that's really where we're going way beyond just long read sequencing and I think.
There are opportunities out there and the market, but we also have to be patient and we have to focus on how do we build or how do we make sure that we execute exceptionally well on our core business. How do we finished we've basically built out our executive team now and so now we can start evaluating some of these things.
Timing is impossible to predict because you can have a vision, but but there's there's lots of different factors and the way and so I guess the one thing I'll leave you with Doug is that we are looking at a lot of different opportunities.
But we're going to be patient and we're going to make sure that we do the right thing.
And if that helps that is fantastic. Thank you for all that detail and I really appreciate all of the airtime and help have a good night.
Thanks, Doug good to talk to you.
Thank you.
Our next question comes from the line of Tycho Peterson with Jpmorgan. Your line is now open.
With surveillance low single digit millions and the first quarter. How do you think about the run rate over the next couple of quarters, there and then.
Christian you flagged of one 7 billion national surveillance fundings of five and set aside I think they're going to build centers of excellence, how do you feel like you're positioned.
And as that gets up and running.
I think Tycho, it's good to talk to you.
I think our run rate with respect of surveillance will.
And we definitely had some infrastructure build and the first quarter.
But I think that that can be offset with other infrastructure build as you get.
And of the year and we acquire some other customers et cetera.
So my expectation is it is kind of in that that.
Low single digit kind of number right right now is as we see it I think that.
There's no question that that our solution is very compelling.
And we are getting good traction, particularly with lab core of course, and so as these centers of excellence.
Start to form up I think we have opportunities to be part of the part of the solution there.
There's no. There's also the reality is that we are still the emerging fish and the pond, so to speak and and I think that that we.
We have to demonstrate consistently that our solutions are.
Not only better than our competitors, but more economically viable and.
And I and I think we can do that the other thing is Tycho we've been building, we just recently hired for.
For example of Vice President focused and government affairs and <unk>.
We didn't have that capability before and so now we have now we have much greater access to government entities and areas and I think that will help us in the dialogue and discussion. So I think we will have a seat at the table and.
And I do think it's a real opportunity for us.
Okay and economically viable you mentioned surveillance of influenza Hai and she pathogen and some of these other markets. I mean are we at a price point now where you think it can be cost competitive.
Sure.
I believe we can be yes, I mean, I do think we have to we have to demonstrate and and solutions and protocols, but I think the bones are in place and as we develop kitted products and show that we can do that not only can we be.
Cost competitive.
Also of revenue opportunity because today when you think about the COVID-19 opportunity for us without a kitted product. We're really just capturing the sequencing portion of the opportunity, which as you know is quite small relative to the total dollars associated with prepping, the sample prep and the other pieces.
That's.
Good.
Think of us.
Right now of the sequencing isn't isn't the big value driver.
It's the kit and.
You know, they're supposed to supply constraints right now on the Oligos, which we need to overcome but kidding. It but there's also the value that you get and that complete kit and so so I think it can be competitive against those other approaches because of the sequencing isn't a barrier for us right now where the cost of the sequencing of some of the barrier.
Okay. That's helpful.
You mentioned that new Hi, Fi protocol, reducing sample input requirements by three ex how meaningful is that and do you think that opens up new markets new opportunities I mean, you flagged blood, but I'm just curious what you actually think that means in terms of real world adoption.
Yes, Mark why don't you take that one.
Yeah, I don't know how much attention its received Tycho, but I'm glad you point of view. So so first of all I will say that the team is focused on delivering advancements now across all of the portfolio from simple, perhaps through downstream of analysis and the pipe.
Sequencing and software releases as I think just a great example of this focus.
The the reduction and input was from 15 micrograms down to five microgram dose.
Five micrograms, and I do see us getting into more sample types now so.
And blood, but getting the tissue biopsies and cell lines, and and so accessibility and lower input applications had been and had been a challenge for us, but I think it's also the speed of it of this new preliminaries does help with accuracy and so again it further pushes.
The number of hifi reads that are at or above that 99, 9% accuracy for whole genome sequencing.
The workflow I think is going to help us get this into into more hands, it's much simpler workflow and and we worked for children's Mercy to make sure it was automation friendly as well.
And some of the other things that you don't even really think she was some of the adaptive loading opportunities and we've built in this and so sorry, you can reduce overloading of smart cells, just actively monitoring of preliminaries that are binding to the bottom of the Z M. W's. So we can we can really help customers load and get the most out of their chips. So so so again, it's a case of Great example of what we can do.
And being down to five micrograms will enable more of these tissue types or simple types to be used.
Okay. That's helpful.
Pops seek and I think Doug had mentioned and then and one of his questions. We did hear from from.
And the day about some newer programs, Egypt and Japan.
And a comment on the share price can you just talk a little bit about whether.
And whether you and the mix on some of these newer paci programs and how you think about the long lead components, except of newer initiatives getting off the ground.
Yeah.
And as you know some of our team has a lot of experience and pops seek and Anna and it's helping us kind of position the company such that we can get portions of these projects now the reality is is that.
Our platform.
To get majority share of of a project.
Probably not reasonable at this point in time, but getting.
Getting a sort of small percentage of.
Of the sample of kind of like with the all of US program. For example, right we were.
And we're sequencing of small fraction of the total, but it's meaningful for us as as the long read and it's meaningful because it also puts hi Fi front and center in terms of being the highest performing.
Chemistry, and <unk> and for sequencing and it sets us up as we launched new platforms and so we are we're seeing.
Most of the same opportunities as our friend.
But.
And our expectation is we capture smaller portions of those of those types of programs and the one and Japan you talked about I mean, the reality is we didn't have and the infrastructure over there and we're just starting that build out so I don't know how much access we will add to that particular program is specifically.
Okay, and then last one for Susan just I want to go back to kind of the <unk> guidance for permanent and if I go back to last quarter, you've obviously got it for the first quarter to be down slightly and Europe, seven and so you had to kind of benefit of the multi system orders and just so we're clear the reason why the <unk> guidance would be flattish is because just the timing of some of the system orders or is there another kind of <unk>.
Conant, that's kind of weighing on the outlook.
Well I think there was a lot of strength and Q1 and so you know we talked about the multi answer and order, but also I will reiterate from our call.
We also benefited from a backlog of projects.
That had been slowed down because of COVID-19 and 2020 and it's starting to ramp in Q4, and it was even stronger and Q1, such that we had the highest utilization on our installed base. So consumable revenue also helped us in Q1 as well.
So looking forward.
That's the largest reason for the flat to modestly higher and QQ.
Okay. Thank you.
Thank you.
Our next question comes from the line of Chaos of Savant with Morgan Stanley. Your line is now open.
Hey, guys.
Good evening so for.
And so on the quarter Christian just just a couple of quick clean up questions here.
Can you quantify what the impact was on consumables from the lunar new year, just to give us a sense for what the true underlying consumable spend was euro and then so.
And then.
And do the remarks, you just met and the consumable side on backlog projects and catch up is.
Is that of a catch up element that you saw in the fourth quarter and as some of these labs opened up and travel restrictions eased up and you could just install those units, which are essentially committed to and.
And in <unk> itself.
So so I'll start.
I don't have the exact.
Cause numbers like it's very difficult to quantify exactly.
Lunar new year effect, because its really just a couple of weeks and you start to question whether or not.
And whether whether or not they make it back up during the quarter I think what we're trying to emphasize.
Lunar new year was typical but the demand for.
From our service providers.
And we do some of their backlog and also the basic expansion is.
More than offset that and actually looking forward some of the same.
Service providers have very substantial <unk>.
Backlog still and so my expectation is they're going to be running pretty significantly for most of the year.
Got it okay.
And then one one of the consumables line.
It should be is is it fair to essentially assume 165000 as it as the new floor and the pull through on the sequel.
I mean, it sounds like even in <unk> last year, you were around 160 day so.
It should only sort of increase from that level and in the quarters and and then perhaps even in the years to come.
I think it's going to bounce around to be honest with you.
And the reason why I think it's kind of bounce around as we can.
Expect to place a lot of systems and you saw we had 41 and the quarter. So that will go into the denominator as we as we do the calculations for this quarter and.
And the.
It takes time, the multi system units to existing customers those will probably ramp up reasonably quickly but for <unk> for new customers. You know, we said we have a lot of new customers and the quarter. It might take it might take three or four months for them to start ramping up to whatever.
Normalized utilization that that we can expect from them and so I think my at least for my perspective, I think the number is going to bounce around a little bit, but you know kind of and that 160 to 200.
Range isn't and that is it seems like a pretty reasonable way to be thinking about it but it will be it will.
Be dependent every quarter on the denominator as much as the.
Numerator and.
The one thing I would point out that Susan pointed out in her remarks was we had record utilization of systems and I want to be very clear when we calculate pull through that's just a number of revenue and systems installed and when we talked about utilization we of software and capabilities.
Monitor the vast majority of our installed base and see.
How often theyre running smart cells, and and and how they're actually and so we look at that very carefully because it's an early warning system to figure out Hey, we should make sure we call that customer to place and reorder or or.
Or while they're really something's changed and must be doing a new project or something and what we had in the quarter was was records across the board and that is actually really exciting. It means people are using their systems, and we're getting great data and and and I think it bodes well for the future.
Got it and.
And then one one of the N V day collaboration Christian.
Now this has been a couple of months I mean, and and you mentioned two of the teams working closely together what.
What are your incremental learnings, particularly in terms of the technical feasibility challenges that you need to address here and then as you work towards that sort of sub one price point that you mentioned right and then also in terms of the milestones that we should be really sort of hanging our hats on and to track progress before and Vijay.
Gets access to that first unit and house.
Is there anything that you sort of intend to share along the way.
Help us kind of like just measure of progress there.
I'm going to and ask Marc to talk about the progress of the butane because he is.
He has this project sponsor internally and he is very close to it but with respect of milestones as we.
As we reach.
Reasonable reason.
Reasonable technical milestones. So for example.
Probably early sequencing data things like that I suspect, we will we will want to share some of that.
But we haven't defined.
Explicitly for investors what those milestones are we're very focused on.
Serving our customer and VK, but mark why don't you.
One of you give a little color on the projects and the progress of the project.
Yeah happy to Christian So obviously, we just announced this and the middle of January but.
I was happy to see how quickly we jumped on this together and so so the teams did start working together right away and as a reminder of lot of this or almost all of this is leveraging our core technologies and high price sequencing and better.
Already in market or were already and development. So so I don't see the size of major miracles required it's scaling and hardening of the development of this week.
We have been meeting with with N V T regularly across a number of work streams and and this is an entire workflow to meet production of whole genome sequencing needs and so so well well we're building and scaling the sequencing technology, we're learning a lot of their front and how they do their DNA extraction and how they do their life library of of automation.
And to ensure that together, we're going to go and build of front end and that's going to get the DNA and great day under the new sequence of we're building I.
I would say, we've also learned a whole bunch of boats, the overall software and informatics.
The production of lab needs and would it be just using to make sure we have seamless integration and so their loved.
And our interpretation engine and future reporting capabilities. So so I'd say the work streams across all of these different fronts are really going well and.
And I don't I don't expect us to deliver a great product and feature with this but this is kind of hurt and a complete whole genome work flow for us to take and broadly commercialized and in terms of milestones Christian and I will have to noodle on what we want to share along the way, but but just a reminder, this is this is leveraging of core technologies and that's a multiyear project.
Got it very helpful. Mark Thanks, guys I appreciate the time.
Thank you.
Yes.
Thank you.
Our final question comes from the line of Steven Mah with Piper Sandler Your line is now open.
Great. Thanks for the questions and congrats on the quarter.
Thank you.
So two quick ones on the on clinical and could you update us on the partnership with Berry genomics to get China FDA approval for sequel too.
You know very continues very continues to work diligently and we're working with them and and.
For my perspective, the project is still on track and so that will be our first that will be our first foray of the clinical and around the world.
And.
The team of Berry's doing a great job of of getting our system ready well, we have and internal team, that's helping assisting with the project as well so.
And I think it's going pretty well.
Okay, Great and then the second part was I know you said that you would continue to partner on the clinical side, but given that early on based on some of your comments and it looks likes of long read hifi sequencing seems to be unlocking new clinical applications.
And so given that and any plans to develop your own clinical programs given the balance sheet cash flexibility.
You know at this point of as part of our core strategy, where we really believe we need to work with others and and really enable our customers and be the.
Be the preferred partner, we think that's a strategy that will.
That will and derisk to many more customers.
And then then otherwise and so right now and no our real focus is on.
And how do we do these partnerships and collaborations that being said we may have to develop.
Some of you know.
Deeper capabilities for example, with cleared instruments and potentially cleared kits because our customers may may of demand that but at this point in our strategy. That's not a core focus of the core focus really is collaborating.
Leveraging others core competencies, while we build out our core competencies and execute on the core business.
And if that makes sense.
And so that makes sense and and last one for.
Oh, sorry.
We've obviously go ahead Martin.
We've always you've spoken a lot now of boat and Vito you and also of Berry genomics, but no I would just also still just highlight groups late children's mercy for rare disease, and and how we can partner there to improve our concrete bullish but even of surgeon I think what they're doing with carrier screening and long reads and this is also another great example of a clinical partnership approach to getting some some non REIT products into market.
Yep Yep and I appreciate the color.
And then.
Last one for me I know, we're way over time, so speaking about children's Mercy, Kansas City, and it looks like that of new high five software release was developed in collaboration with them.
Did you guys leverage children's Mercury's existing database of rare variance or other expertise there and if so is there any share at IP with.
And with children's Mercy.
Yeah, it's not it's it's really more of a core technology. So it's not it's more of.
And how the software actually.
And how the software actually runs and it's not so much.
Trying to create shared IP and variance for example, it's really more of leveraging their expertise to make sure. We create the best product we can for all of our customers.
Okay, great. Thanks, I appreciate it thank you.
Thank you.
Thank you and this concludes today's question and answer session I will now turn the call over to Todd Friedman for closing remarks.
Thank you all as a reminder, a replay of this call will be available on our website and the Investor Relations section.
And as well as through the dial in and construction and instructions contained in today's earnings release. Thank you for joining the call. Today. This concludes our call and we look forward to updating you on our progress and the second quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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