Q3 2021 Pacific Biosciences of California Inc Earnings Call
Do they have we want this is the operator speaking todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
Once again today's conference. He is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Good day, everyone and thank you for standing by and welcome to the Pacific Biosciences of California incorporated third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode and that'll be the speaker's presentation. There will be a question and answer session to ask a question.
During the session you will need to press star one on your telephone and if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to the director of Investor Relations. Mr. Todd Beekman Pease go ahead Sir.
Good afternoon, and welcome to <unk> third quarter 2021 earnings Conference call.
Earlier today, we issued a press release outlining the financial results, we will be discussing on today's call a copy of which is available on the investors section of our website.
W. W. E T. A C D dot com or alternatively as furnished on form 8-K available on the Securities and Exchange Commission website at Www SEC Gov.
With me today are Christian Henry.
And Chief Executive Officer excuse.
Susan Kim Chief Financial Officer, and Mark <unk>, Chief operating officer.
Before we begin I would 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.
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 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.
In addition, please note that today's call is being recorded and will be available for audio replay on the investors section of our web site. Shortly after the call invest.
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.
Thank you Todd and good afternoon, everybody. Thanks for joining us on today's call I will start with a brief update on our strong third quarter performance next I will discuss the progress we are making in some of our target markets and finally I'll share how both Pac bio and the research community more broadly our inner.
Waiting to further drive the utility of Hifi sequencing.
Susan will discuss our financial results and full year guidance.
Q3 marked another successful quarter as we continued to make solid progress against our strategic initiatives. We achieved another all time record for revenue in the third quarter with product and services revenue of $34 9 million and 83% increase compared to the third quarter of last year, and a 14% increase over there.
The second quarter of this year.
We installed 44 equal to and TUI systems, which is also an all time quarterly high and brings our total installed base to 326 units almost double the installed base. We had at the end of the third quarter last year.
Sequel to in two weeks is now the most installed Pac bio sequencer in the history of our company and we are on pace to break a record for the most sequencer is placed in a single year.
Nine of our system orders were new to Pac bio instrument customers from across all regions. This is encouraging as it demonstrates our investment in developing a world class commercial organization is enabling us to reach more customers than ever before.
As of the end of the quarter, we have doubled our quota carrying sales team achieving that goal a quarter ahead of our plan.
Additionally, the product enhancements that we've made over the past year are providing more value to our customers, which is driving adoption of our platform.
Over the past year, we've been working to develop tools to help us understand our growth in specific target markets and today. We're pleased to provide some insight into the revenue contribution from these key markets. We will provide this information a periodically. Additionally, please note.
The size and relative growth rates are approximate and intended to be used as directional in nature.
First the human Germline market, it's our largest and fastest growing and contributes just over one third of our total revenue year to date.
In this market our translational research customers focused on areas like rare an inherited disease carrier screening farmer could genomics and H L. A as well as population genomics and other research initiatives here.
Human Germline includes customers like children's Mercy Research Institute, which is showing signs of success using pack by a hi Fi in the genomic answers for kids program recent.
Recent findings from the Institute help substantiate the use case for accurate long read sequencing in the clinical research setting. The program is completed over 600, Hi Fi genomes today, and then covered multiple diagnostic findings attributed to disease, including structural variance single nucleotide variance Andrew.
Repeat expansion disorders that we're not found with previous sequencing methods spa.
Specifically <unk> uncovered over four times more rare coding structural variance than short read W. G. S and found variance in genes of unknown significance and over half of the N diagnosed cases.
These genes are variants may prove one day could be pathogenic and provide insight into unanswered questions today.
Outside of rare inherited disease customers in our human Germline focus include pre Netflix, a leading genetics and diagnostic health testing company and a new instrument customer in Q3 that installed the sequel to lead to further differentiate its carrier screening test outside the United States.
It also includes existing Pac bio customers like Berry genomics very announced last week. They received an M. P. A approval for the sequel to which they will brand as the sequel to C. N Dx in China as a clinically qualified system.
This approval is an important step for them to submit data for clinical trials and it's planned for selling the sequel to directly to hospitals.
This milestone also marks the first regulatory body to approve a pac bio instrument.
Other programs in our human germ line category includes the human Pan genome reference project, which uses pacbio sequencing to build a more diverse representative reference genome.
The project has already been made available over 40 referenced quality human genomes to researchers around the globe and expects to complete hundreds more.
Moving on the plant and animal market with the myriad of diverse and complex genomes continues to be a main staple for highly accurate long read sequencing and year to date represents just under one third of our revenue. This category includes initiatives like the European reference genome Atlas, which is leveraging <unk>.
Marked by a hi Fi sequencing to help generate referenced quality complete an error free genome assemblies towards its goal to ultimately assemble at least 200000 plant and animal species across Europe.
It also includes customers like the USDA, which installed installed multiple equal to lease in the third quarter utilizing their remaining year end budget.
We're encouraged by the Usda's progress towards its five five year science blueprint and its goal to use WGS to tap into genetic diversity and use genomic technologies to accelerate breeding progress decreased susceptibility to climate change pests and diseases and increase yield potential.
Next roughly 20% of our business comes from infectious disease, and micro microbiology applications, which includes customers like Drexel University, who install the sequel to me to address its needs for COVID-19 research today and to have a pathogen surveillance solution on hand that prepares them for the next.
Emerging threat like respiratory infections.
So related to infectious diseases, and microbiology and Cabos biotech are African distributor has partnered with the African center of excellence for genomics and infectious disease to place. The first sequel TUI in West Africa.
Professor Christian Hoppe will implement hifi sequencing at the center to fill the gaps from other short and long read technologies and to help provide a more complete genetic picture of viruses and microorganisms finally.
Just about 10% of our revenue today comes from oncology in emerging applications, while still nascent today long read sequencing has been demonstrated as a useful tool and emerging applications like gene therapy, crisper, and synthetic biology, and we see a growing list of publications and studies.
Putting the Houston pack biotechnology in these areas.
What's exciting to me is that athlete reach more customers, we expect to see important new applications of lari sequencing emerge, which will further catalyze our growth.
Finally, we expect the addition of a short read sequencing platform to drive growth in oncology application upon its launch.
One of our core strategies to accelerate the adoption of hifi sequencing has been to develop end to end kitted solutions to make pack bio sequencing accessible to more labs and to simplify customer workflows.
One of these kitted solutions includes our high five viral kit for COVID-19, which we expect to launch in the coming weeks.
Hi Fi viral allows customers to scale genomic surveillance testing quickly and efficiently with an accurate and robust solution to capture all variance including novel mutations.
Our view it also offers a simpler kit then protocols from other providers.
With fewer reagents and less pipe petting at a very competitive price.
University of Louisville for example explained that their early access use of hi Fi viral allow them to reduce hands on time by 80%, while improving mutation detection compared to PCR amplicons approaches used by other sequencing technologies. We are extremely proud of this assay design.
Our team developed a robust product with redundancy and capture design, allowing hi Fi viral to catch emerging variants and we've already seen it identified novel variants missed due to the other assays fixed the designs.
We look forward to sharing more when we officially launched the kit in the next few weeks.
Hi Fi viral we plan to also release, an updated end to end microbial genome Assembly application on the sequel II system. This update doubles, the current multiplexing capacity, while continuing to deliver the industry's leading standard for rapids quality microbial genomes.
Together. These two releases provide public health and microbial research labs with a powerful menu of applications to service a broad range of use cases on their sequel to re platform with this exciting set of improvements for WGS, we're continuing to build on <unk> unique ability to simultaneously detect.
Not only the genomic information, but also the epigenetics signature.
We're expecting to bring an updated and vastly improved version of this feature to the sequel to in TUI platforms. Early next year and have received immense interest in this feature at S. H G last months customers are already talking about seamlessly, adding methylation to their pacbio sequencing runs to bolster their reach.
Search.
As you can see we're committed to making hifi sequencing not only the highest quality, but also the easiest to use and the most complete data type available with the addition of circular mix in the third quarter. We are already beginning to see progress in simplifying and improving the long read sample prep.
This past quarter. The team collaborated with the Correale Institute for medical research to develop a high molecular weight DNA reference product based on its N. I G. M. S. N next year IDE cel repositories, which are among the most widely used.
Repositories and genomics research.
<unk> adoption of manner bind is a testament to the superior quality of the technology and the growing demand for long read sequencing, which often requires high molecular weight DNA.
We are pleased to have a solution in house that addresses this important part of the long read sequencing workflow and we're fully committed to supporting customers on any platform.
In the backdrop of all of these improvements were pleased to see data published in September from the association of bio molecular resource facilities that compares major commercial short and long read sequencing technologies, which affirms Pac bio as a leader in accurate and complete sequencing spin.
Specifically the publication shows that circular consensus reads or hifi reads had the lowest error rate of all technologies and the highest mapping rate and the highest precision and calling variance in clinically relevant regions.
And there is still headroom to make hi Fi more accurate as the scientific community keeps pushing their boundaries.
<unk> team at Google Health for example, shared a feasibility study on their deep consensus tool that builds on Pac bio software to produce even more accurate hifi reads. According to the pre print the software review street level errors by 42% and increased total hi Fi yield by approximately 9% the tool.
Also increase the yield of Q3 and Q40 reads.
Similarly, the pack bio team collaborated with filing from additions at Nvidia.
Studied to train deep learning models to Polish hifi reads and reduce errors by 25% to 40%.
As you can see sequencing accuracy is a north star and we will continue to invest in raising the bar.
Improved accuracy has the potential to translate into more clinically relevant genomic discoveries more complete and better reference grade genome assemblies, both human and nonhuman and higher sensitivity to novel mutations in viruses and bacteria.
As we expand our installed base and get hifi sequencing into more customers hands. It creates an environment, where researchers can push the boundaries of sequel, too and it's addressable applications. The broad Institute for example, recently published their math ISO seek protocol, which has the potential to <unk>.
Transfer them the way single cell in RNA seek are performed according to the road. This new protocol achieved up to 22 times improvement in throughput generating up to 40 million isoform reads per ATM smart cell and is fully compatible with most protocols that generate full length C. DNA.
Including existing Tenex genomics single cell C DNA libraries.
Not only is this a breakthrough in the amount of single cell data obtainable and it's equal to run but to safely full length isoforms is something currently unattainable on short read single cell sequencing or site C.
This is especially important as their unique isoforms associated with specific cell sides relevant to cancer and disease.
Finally.
And a half after we completed our acquisition of Omnium I'm priests are pleased to report our development timelines remain on track globally to launch the first platform using your technology in the first half of 2023, our combined R&D teams are making solid advancements leveraging each other's expertise we have seen.
An increase in the number of invention disclosures submitted including dozens of new disclosures leveraging the synergies between the companies technologies.
With that I'll turn the call over to Susan to discuss our financial results Susan.
Thank you Christian.
We are pleased to report another record revenue quarter in the third quarter 2021, with $34 9 million in product and service revenue, which represented an increase of 14% from $30 6 million in the second quarter of 2021, and an increase of eight 3% from $19 1 million in the third.
Quarter of 2020.
Instrument revenue in the third quarter was $15 9 million, an increase of 12% sequentially from $14 3 million in the second quarter and a one 6% increase turns down <unk> 7 million recorded in the prior year quarter. We delivered 44 sequel to in two weeks systems during the third quarter.
<unk> growing the installed base of 326 systems as of September 30.
Turning to consumables revenue of $14 6 million in the third quarter grew 19% sequentially from $12 2 million in the prior quarter and was up 82% from $8 million in the third quarter of last year.
The growth in consumable revenue reflects increased smart cell usage as a result of our growing installed base of sequel to an <unk> system and increased average utilization per instrument.
Equal to and Kiwi consumables represented approximately 85% of our total consumable shipments in the third quarter with the rest from older systems and other consumables.
Annualized pull through per system on the sequel to in TUI installed base in the third quarter remained relatively strong at approximately 175000.
We continue to observe increasing utilization from customers connected to our smart fleet network. Further evidence that customers are sequencing are passed by more than ever.
Finally service and other revenue grew to $4 4 million in the third quarter compared to $4 1 million in the prior quarter and $3 4 million in the third quarter of 2020.
Our service revenue growth reflects the growing installed base is equal to in two weeks.
Shifting to a regional view America's revenue of $19 4 million more than doubled from the third quarter of last year.
Of note in the third quarter, we installed the first sequel to unit in South America.
Moving to Asia Pacific revenue of $9 2 million grew 58% year over year and marks the fifth straight quarter of consumable revenue growth, representing the increasing installed base and continued improvement in utilization since the start of the pandemic.
Finally, <unk> revenue of $6 3 million was up 46% compared to the prior year and roughly flat on a sequential basis. Our commercial presence continues to expand in the region and we signed additional distributors in the third quarter, including in Spain, and the Middle East and North Africa, and they have already shown.
Tangible signs of trading business.
As a result of our recent acquisitions starting this quarter, we will begin sharing both GAAP and non-GAAP results for gross margin operating expenses and net income or net loss.
We believe that reporting GAAP and non-GAAP measures will provide our investors with a deeper understanding of the company's operational performance.
I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release for more information.
GAAP gross profit of $15 4 million in the third quarter of 2021 represented a gross margin of 44%.
Excluding fair value inventory adjustment and amortization of intangibles third quarter of 2021, non-GAAP gross profit of $15 7 million, representing a gross margin of 44, 9% compared to a gross profit of $13 8 million or <unk> 44, 9% in the second.
Quarter of 2021.
It's from higher factory utilization were partially offset by expenses, we incurred as a result of continuously enhancing our manufacturing process as we drive higher volume through our factory.
Year over year non-GAAP gross profit was approximately seven nine points higher compared with 37% in the year ago quarter, driven by the higher volumes and improved factory utilization.
Moving on GAAP operating expenses were $89 8 million in the third quarter of 2021, which included merger related expenses of $11 8 million in merger related compensation expenses associated with equity acceleration in the context of the omnium acquisition of 18.
9 million.
Excluding merger related expenses non-GAAP operating expenses in the third quarter totaled $59 1 million up 15% sequentially compared with $51 3 million in the second quarter, and 89% higher than $31 2 million in the third quarter at the prior year.
The increase in operating expense compared to the previous quarter and last year was primarily a result of higher head count related spend in our R&D and commercial organization and expenses added from acquisitions in the third quarter.
In terms of head count we ended the quarter with 687 employees.
Increased from 492 as of June 30 was primarily due to hiring in our R&D organization as well as the acquisition of <unk>.
As of September 30, we have also doubled our quota carrying head count from the start of the year with further growth expected in the fourth quarter.
GAAP operating expenses in the third quarter included a total noncash stock based compensation expense of $26 6 million, which included $11 5 million expense related to the acceleration of certain equity awards as part of the acquisition of omnium.
Excluding merger related noncash stock based compensation third quarter 2021, non-GAAP stock based compensation was $15 1 million compared to $13 9 million in the prior quarter and $4 3 million in the third quarter of 2020.
In Q3, we booked a discrete income tax benefit related to the acquisition of <unk> and circular mix. Both acquisitions were considered non taxable acquisition for tax purposes, and therefore, the acquired intangible assets do not receive a tax basis adjustment to fair value the book.
The tax basis difference resulted in a release of a portion of the valuation allowance.
The end result was a one time discrete noncash income tax benefit on the GAAP P&L of $94 8 million in the quarter.
Interest expense in the third quarter of $3 7 million reflects the interest expense associated with our convertible notes.
GAAP net income in the third quarter of 2021 was $16 5 million or eight cents per basic and diluted share.
Excluding merger related adjustments non-GAAP net loss was $47 2 million and net loss per share was <unk> 23, compared to non-GAAP net loss of $41 million and net loss per share of <unk> 21 in the second quarter of 2021, and our non-GAAP net loss of $23 7 million.
Our net loss of <unk> 14 per share in the third quarter of 2020.
Now turning to our balance sheet, we ended the third quarter with one point, okay, and unrestricted cash and investments compared with $1. One 4 billion at the end of last quarter and $319 million at the end of 2020.
Inventory balances increased in the third quarter to $18 3 million, representing $4 two inventory turns compared with $18 8 million at the end of the second quarter of 2021, which represented three nine inventory in time.
Accounts receivable increased in the third quarter to $23 9 million, reflecting a DSO of 58 days compared with $19 9 million at the end of the second quarter of 2021, reflecting a DSO of 49 days.
Long term deferred revenue grew approximately $8 3 million in the third quarter to a balance of $18 4 million.
Increased reflecting largely the cash received from <unk> as part of our collaboration agreement to develop and ultra high throughput sequencing.
Now moving to guidance for the full year 2021, we are maintaining the guidance.
We provided on our Q2 earnings call in August 2021 revenue is expected to grow in the range of 62% to 67% compared to 2020, which represents an annual revenue of approximately $128 million to $132 million.
We had a record quarter in Q3 was equal to and TUI shipments at an all time high as we previously discussed quarterly revenue mix can be variable based on timing of instrument placements in a particular quarter.
We still expect sequel, <unk> installations to grow in the second half from the 79, we installed in the first half of the year.
Moving down the P&L, we expect 2021, GAAP gross margin to be between 44% and 45% on a non-GAAP basis, which excludes merger related fair value inventory adjustments and amortization of intangible assets to be about 50 basis points higher.
In the backdrop of global supply chain pressures. Our team has worked diligently to procure sufficient inventory to meet customer demand for the next several quarters and beyond however, if there is an unexpected material disruption to our global supply chain, our higher than expected increase in customer demand. It may become difficult to continue ensure.
<unk> sufficient availability to meet customer demand similar to others in our industry.
As a result of supply chain pressures, we are starting to incur higher prices for raw materials and components, which may have an impact of 100 to 200 basis points on our gross margin over the next several quarters.
For GAAP operating expenses, we expect the full year, it could be $263 million and $267 million.
Excluding merger related expenses of approximately $31 million in the third quarter, we expect full year non-GAAP operating expenses to be between $232 million and 236 million. This is roughly $15 million higher than our previous full year guidance largely were affecting omnium, reflecting.
Operating expenses from Omnium. This guidance also includes R&D expenses associated with U V T collaboration, which we expect to be approaching $20 million by the end of the year.
For the full year, we expect interest expense to be approximately $13 million, which reflects interest expense and amortization of debt issuance costs for our convertible notes issued earlier this year.
We expect weighted average share count for purposes of EPS for the full year to be approximately 204 million shares and 221 million shares for the fourth quarter. The increase in weighted average share count reflects 11 2 million shares issued for our type investments and $8 9 million shares issued for the <unk>.
Acquisition consideration in the third quarter.
As a reminder, please refer to our press release for a full reconciliation between GAAP and non-GAAP net loss for the nine months ended September 32021.
With that I will turn the call back to Christian Christian. Thank you Susan with a few months left in 2021 I am proud of all that we've been able to accomplish this year as our achievements position the company well for continued long term growth.
We announced and closed the first two acquisitions in the company's history during the quarter and we're extremely pleased with the omnium in circular IMAX teams as we continue growing our company and building out our new pack bio locations in San Diego in Baltimore.
As I discussed earlier, we performed a more detailed analysis of the markets that we serve and we are translating these learnings into sales opportunities for our expanded commercial team.
We continue to invest heavily in our long read smart sequencing platform with a focus on improving the end to end workflow dramatically, increasing throughput and lowering the cost of highly accurate long read sequencing.
We are also accelerating the development of highly accurate short read sequencing acquired through our acquisition of Omnium, we believe that having both long and short read platforms in our portfolio will enable us to offer solutions to our customers that will help them resolve biology, and ultimately enable the promise of genomics to.
Better human health.
Finally, I look forward and invite you all to our virtual user group meeting next week November 9th where customers from across the globe will share our hifi sequencing as expanding knowledge of genomes and inspiring advancements in science and with that I'd like to open the call for questions operator.
Thank you Christian.
I mean, when we started like to remind all participants to ask a question. Please press star and the number one telephone now with our first question Mr. Tycho Peterson of Jpmorgan. Please go ahead.
Hey, Thanks, I'll start with the the supply chain dynamics, Susan flag at the and I know, you're reiterating full year guidance. So it doesn't seem like near term issues and I think you've shored up semiconductor supplier.
All of this but as we look ahead to other component shortages that you have to kind of worry about whether its cameras or semis or otherwise and are you starting to have to work down inventory in the near term.
Yeah. So tycho thanks for the question I'm going to have Mark answer the bulk of it but you know one of the good things about having a very strong balance sheet position is that we're able to.
Order well well in advance and we've done that and so we are generally in pretty good shape, but I'm going to ask mark to step in and address the specifics.
So it goes to as Susan mentioned, a little bit of extra cost we have secured some extra supply come to make sure that we're okay. So the one good thing, but haven't really long lead time.
Really long lead times on our products.
We can plan for ahead.
Actually working a little bit in our favor that we have significantly simply long lead times, but <unk>.
These have been one of the hardest things for us to get a hold of and obviously, we'll be battling the auto industry, there a little bit but.
But we feel pretty good about our slipped supply position right now.
And I would say, we feel very very comfortable with the near term and even even the first half of next year and it's really.
We are positioning the company well for the second half of next year.
And then on.
The end markets Christian I appreciate all the incremental color that was super helpful. In terms of your customer segments are you able to give us a sense for hi Fi penetration you know what percentage of your customers are using it.
I reach today.
Some of these things like the Nvidia and Google enhancement is going to be rolled out commercially.
What's interesting on the new applications front, you know you mentioned there are a handful of new ones coming.
Yeah, a lot to unpack there but.
<unk>.
In terms of people using high five we're seeing more and more adoption people moving away from.
Moving away from traditional sequencing to Hi Fi.
In fact, I think all of our applications now are hi Fi enabled and so folks are starting to move that way I suspect that will be the predominant way people continue to go forward.
<unk>.
With respect to kind of some of the informatics.
Advancements yet we fully intend to make as much of that.
Clinic are commercially available as we can.
It really will it takes a bit of time, because you have to think through the compute that people have in their labs already and make sure that the algorithms are capable of being completed in kind of the standard customer labs, but clearly high throughput customers cut.
With large it.
Infrastructure's already we will be able to take advantage of these advancements in and I think that's really important when we look down the road, we talked about we talked about the end to end workflow and today in my section I talked a lot about.
Sample prep and how we're making really great progress there with the launch of our first kiss, but it is it is also continuing to improve the backend the raw read accuracy continues to improve and that just gives us more more opportunities and applications.
You asked about the emerging applications, we've seen some really.
Really great progress in AAV with some customers. So I think gene therapy, Chris for kind of those emerging areas I talked about in my section synthetic biology is a very powerful area for us and then finally it.
Can't be underestimated this mass mass ISO seek paper that came out from the broad.
<unk> enables isoform sequencing RNA in a whole new paradigm that short reads can't get access to and we can do it at a scale now that makes it very competitive and very compelling and so I think I would look for us to be <unk>.
Developing core kits around that making that making those applications simple easy to use so customers around the world can get access to it.
But as I've said.
In the past the more we drive our installed base. The more these new applications are going to emerge and we've seen this happened before in our past where.
As you drive in deeper into the installed base and build that installed base new applications emerge from maybe places where you were thinking and create very significant business opportunities and we're at the very beginning of that opportunity, which is pretty cool.
Great two quick ones before I hop off on Omni AUM and then also the in VK clinical whole genome sequencing are there milestones over the next year that you would point us to that we should be paying attention to on the development path and then speaking of next year, you're willing to make any comments on 'twenty. Two at this point I think the Street's got you at about $188 million.
Yeah.
Simple one on an eye on guidance for 'twenty two.
I think our business is continuing to grow I think we're positioned really well to keep growing but I won't give specifics.
Until we get there, but but I do I do think that one of my objectives is to keep growing every single quarter.
Keep pushing.
Pushing driving delighting, our customers with great products and so I'm excited about 'twenty two.
You talk about.
Omnium in the road to getting that product launch I think the first thing you'll see is you'll start to see some data come out using using our new amplification method.
And that new amplification method, so just to take it back a notch.
Omnium had fully developed in TCR front and in fact, they went through.
Our beta test this.
This past quarter and it was very successful actually but the problem with that front end is that to where we want to go with ultra high throughput fully scaled capabilities, we needed to develop a new front end that front ends already deep in development and I would expect to see data coming.
Out of sequencing data with that front end.
And then I would see I would expect to see.
Conversations about beta tests in early access and things like that.
Before we get to full launch in 'twenty three and my expectation is when we say full launch Leeming global launch anywhere in the world with our fully developed commercialization capability, which I think will give us.
Give us a really powerful platform to get this great technology to market.
Okay. Thanks.
Yeah. Thanks, Tycho Oh, you know what.
Mark was going to cover and VK, So I missed that.
Some key milestones so obviously on the omnium front do look for some more demonstrated data generation next year and Vijay we actually have our quarterly joint steering committee with them next week, and we're making great product.
Progress on all of the concepts around that we built.
On all of the preliminary assumptions and all the design input I'm actually looking to exit our concept is about you know next week once we get through that meeting. So so really encouraged with the way the teams are working together.
Awesome, new working groups within visa. So we've got a whole sequencing workstyle growth group, we've got a front end sample prep, where they have amazing automation expertise and then another team working on the computers and computer infrastructure because you can imagine.
You can see that many genomes is going to require a lot of compute power on the backend, but but really really remain encouraged with the engagement and looking forward to the meeting with them next week.
And I think.
Take that development parlance that debt.
Mark was talking about what it means is that the project is still right on track, it's where we would expect it to be at this point.
As we exit concept into the into the feasibility and then development phases of a program.
We will we will be able to start demonstrating data demonstrating working units and really prepare ourselves for launch.
In accordance with the timeline, we've outlined we havent really publicly talked about it but.
We're right on track.
Great. Thanks for the update.
Yes.
And for our next question My I'm, sorry, Carl Mixon of Canaccord Genuity. Please go ahead Sir.
Thanks, Hey, guys. Thanks for taking my questions congrats on the quarter and pre networks and the sourcing great updates.
I want to start with the kind of like your thoughts on the competitive landscape and how that's evolving.
Your main longer your competitor isn't pretty busy with some publications have their own highlighting things like using short read libraries for long read sequencing among other things and it also obviously publicly on the U S. So I guess are you noticing any change in the competitive landscape environment or any changes in the types of requests from customers, especially internationally.
Maybe in Europe or in Asia. Thanks.
Yeah, Kyle Thank you for the question and.
Thank you for the comments on the quarter with respect to our competition and long reads.
It's interesting because as we learn more about what where they're driving their revenue and we're driving our revenue.
We are actually don't overlap very much because in.
In competitive situations, we continue to see that we ended up coming out on top.
And I think that's because <unk> has a clinically focused human.
Human sequencing company.
Company, we our systems are highly reliable that give you the answers that you want.
Et cetera, and I think that's one of the reasons why.
We continue to grow they're continuing to grow outside of the United States.
We're building the commercial infrastructure now so we can reach all those customers and we're making great progress in China, great progress in Europe and.
And quite frankly in Japan, and Korea, and the rest of the rest of APAC and so from my perspective, I'm really excited about our prospects and I don't think.
I don't think were slowed down and from a competitive dynamic very much at all however.
I respect I actually think it's great to have competition in the market because it gives it pushes us hard.
Our competitive people and.
And we want to just give customers the solutions that they need and so so I think on balance we're.
We're respectful of our competition, but I don't think its slowing down our growth quite frankly, one iota.
Okay I appreciate that Krishna that was really helpful. I agree the Marriott.
And one reason I wanted to turn to Tommy I belief that there were plans to possibly submit or announcing publications with Neil maybe in 2022.
<unk>.
I guess is that still the plan or is that a plan and then I know this was touched on in the last line of questioning, but I guess, how what's the kind of adjustments to the amplification method going without me.
Have you seen any encouraging data thus far.
I guess it sounded like Youre launching the first half of 'twenty, three which is encouraging but anything tangible that you now have you seen so far that really makes you excited.
Yes.
I mean, we're seeing great data everyday to be.
I'm not even over time, not overstating that one bid I think the team has done an amazing job.
Sure.
Really close to commercial specs on what we want to launch with it with the with the clustering method that we're working on.
And we're plugging that right into the sequencing workflow. The sequencer is taking that data and working really well generating exactly what we would expect probably a little bit ahead of our schedule quite frankly.
But we are seeing the first half of 'twenty, three and 'twenty two you'll clearly see.
Youll see opportunities for us to present data hopefully at peer reviewed publications that.
That everyone can get their arms around and understand how powerful this accuracy really is.
And show how.
The densities of which will be able to operate which will allow you to give.
Hundreds and hundreds of millions of reeds.
Per run, which will make it competitive with other counting type technologies in the market.
And so you know.
We are we're very encouraged about what we're seeing and we're also I talked about this in my.
In my prepared remarks, and I'm a bit.
I'm pleasantly surprised at how much <unk>.
Now technical synergy there is between the teams and how aggressively the teams have already been trying to leverage that.
As you know the single molecule sequencing technology gives us very.
Very powerful core competencies, and enzymology, and Andi chemistry, and things like that surface chemistry, but also in the informatics and simplifying the compute workflow, which if we can solve the problems challenges we have with smart sequencing moving that moving a lot of those ideas to SBB.
We will make that will make that development go faster.
And also probably provide higher quality results then if omnia on would have been standalone. So on every on every level right now we are seeing.
The integration is going well the product development its proper product development the beta tests I talked about on the prior.
Using that using the PCR methods went really well and that that why that's important as it shows it.
It shows the sequencing capability as well as the instrument performance gives you a lot of indications on how well the instrument is going to work, we're doing some redesigns of the instruments, but not.
Not significant its not a ground up redesign or anything but it will make it more powerful more user friendly.
And more capable to really go.
Get into the market and build that beachhead as I talked about when we closed the acquisition.
The only other thing I'll add title.
I'm really impressed with a technological shift I'm always meet PCR.
Also we are encouraged by the conversations I'm, having with people that wanted to explore what applications is higher readout currency would benefit yes. So some really good external conversations about access to some sample types to really go and start to explore 240 <unk>.
I mean, as you know Mark Mark runs our corporate development group.
In addition to his day job.
Is really.
<unk> been taking the charge, leading a lot of very.
Important conversations around the Omnia on technology, which which is bodes.
Bodes well for the future of the technology.
Perfect I appreciate all that color guys. Some of that was also I wanted to just ask one quick one before I hop off so about Covid I'm sure you saw the same trends, but the COVID-19 sequencing data at least published from CBC.
Really stepped up in the summer months I was wondering if you could break out.
If that was a material portion of revenue during the third quarter, and then related to that I guess.
<unk> solution is going to be launched in the fourth quarter I guess as expected.
Maybe maybe mark could you just walk through just one more time why that so meaningful compared to your kind of current ability to do the us or don't testing.
The new Hi Fi viral again, maybe maybe start with that why hi Fi viral why we're so excited about it and I'll, let Susan move onto some of the Covid revenues, but yes.
A couple a couple of things that this was important for us to prove first to prove to ourselves that we could get a product and so this is really our first end to end workflow with library prep through sequencing kits with the back of informatics and.
Developing those capabilities with an important thing for us to do that.
What I really like about this new product as we move now to doing an enrichment with molecular conversion copes.
Which dramatically.
The workflow in the hands on time.
And so if you compare that to Arctic PCR approaches or other other approaches of our market youre going to start to see this really seamlessly plug into existing automation and laboratory technicians system basis, and so we really wanted to make sure that we're going to create a differentiated product from a workflow perspective and also from the way we've been able to tie all across the virus.
Yes.
We're unlikely to suffer from dropouts and food discovery of new variances can be really important to us those continued to emerge. So so we do feel that we've created not just a workflow for the first time, but a really good workflow thats going to benefit laboratories around the world and somehow the data quality that I think is representative of what we're trying to build as an organization.
Yeah and.
Kind of in terms of revenue volume, we've talked about it kind of in sort of the single digit millions of revenue and we're continuing to kind of maintain that revenue level. We're expanding the number of customers. We're supporting for a COVID-19 surveillance and of course, we're super excited by the Hi Fi viral product that's going to be released this quarter.
So continuing but for us it's all about introducing that fully kitted Friday and getting that out into the market. So that we can expand some more customers. Yes. The challenge styles, we get such as we get such a small fraction of each sample in terms of dollars.
Because we don't advocated solution and so, albeit more samples are being sequenced in our revenue, but our revenue is still kind of hovering in the few million dollars a quarter. So I wouldn't say it was a significant contributor to the over performance of the quarter. It was really the core business.
And that was the core and it wasn't also at Wilson also significant.
One time multi system orders, we are multi system order volume isn't the valid in the same place from quarter to quarter. So it's really the expansion of the sales force draw.
Driving those individuals' instrument orders into new territories, particularly in the Americas as we split territories and those territory splits are giving us the opportunity to actually talk to more customers.
And with our.
Generally raising our profile from I think that's driving our sales funnel and our sales funnel is.
Healthier than it's ever been.
Great. Thanks for all the detail everyone.
Cheers.
And for our next question from Joseph <unk> of Morgan Stanley. Please go ahead Sir.
Hey, guys.
Good evening I just wanted to go back to the instrument guidance Susan.
I think you mentioned doing more than 79 units in the second half of the year.
And my math by my math that sort of suggests about 35 units as a floor for the fourth quarter, that's a pretty big sequential step down.
And I am sure there is upside to that number but I'm just curious whether you expect to exceed 44 or did you have any pull forward that we should be thinking about in the third quarter here.
Yes, so I'm going to take that one and the reality is is that we.
<unk> did not have much pull forward from the fourth quarter.
Business continues to grow but we are we continue to say that the instrument number will be variable from quarter to quarter as you've seen in each of the three quarters of this year so far.
You're right that range might be might be more variable than what we've seen in the last few quarters, and therefore might be a little too wide but.
But at this point.
We're playing to grow every single quarter and very focused on serving our customers, making sure that we drive instrument placements.
And.
Preparing our customers for 'twenty, two as well so there's a lot of factors involved in you know I think what Susan said is more than 79. So.
I think you can take it at that.
Got it okay and a question.
What are you expecting around the year end budget flush on that sort of related notes here.
That's a good question and it's always.
It's still quite early enough in the quarter, where we don't know that answer yet.
Have had good good quarters in the past Mike.
My first full quarter last year in Q4.
There was we had a very strong quarter because of some budget flush issues.
That's not an issue, but budget flush opportunities and.
Who knows we are being thoughtful about not getting too far over our skis and just continuing to focus on the base business and if it's incremental orders come in we're prepared to supply them.
<unk> team has done a great job of getting the supply chain and the manufacturing organization ready to support a whole range of outcomes, which I think is quite exciting.
Got it and then.
One of the commercial expansion here.
You said you doubled your quota carrying sales team a quarter ahead of plan and your plan to grow further in the fourth quarter.
Do you have a new target in mind relative to the 22 reps you had as of.
Year end 2020, and then any color that you can share in terms of the new rep productivity.
Yeah, so the new.
I'll start with the productivity question I think the one thing we found and I said this I think I've talked about this on our last call is that reps that are going into into greenfield territories are taking longer to get ramped up.
Then than say, our historical norm and so they perhaps are taking as much as three quarter three.
Six months to nine months to get going reps that are going in where were split a territory and there's already some funnel building are probably on the order of six months.
Outside the United States.
It's actually much more variable because because those territories you have funding funding is a much bigger obstacle in the sense of getting through potential tender processes and and.
And just lower levels of funding relative to the U S. In general, but I think on balance six to nine months.
<unk> is appropriate and what we're seeing I do think and I've said this in our prepared remarks that we.
We are seeing the benefit of.
Expanding our commercial organization, because because and you can tell because you could see how strong Americas was for example, and Youre seeing much more single unit orders than we've ever had before which means we're just reaching more customers and where.
And people are excited about the sequel, TUI and the value proposition there theyre seeing the advances, we're making on the front end and the backend and so the overall value proposition is becoming more compelling when I think out into 'twenty two.
I think we need to continue growing our sales force and I think the focus will be principally in Europe.
But at a loss of Europe will be a core expansion into Asia Pacific So expanding some in Japan.
In Australia Korea.
I think those are opportunities I think there's huge opportunities for us in China, it's likely we'll figure out how to add.
Put some more leadership into China. So that we can have a much more aggressive effort in that area and expand the end of customers quite a bit and so that'll be a big push in 'twenty two.
When you think about sales reps do we double the sales reps. Some here I don't know, we'll wait to see what the budget tells us in a few weeks.
As we wrap it up but I wouldn't be surprised that that we have to be.
We have to make sure we're reaching as many customers as possible.
Got it and then one final one on China for me Christian.
That's obviously a major geography for you can.
Can you give us some color there what are you seeing in terms of the order book and flow through and how do you see those trends evolving post FDA approval here.
Yeah, I think I think it's too early to say post approval I think I think we'll wait and see and talk to and talk to Barry that's pretty fresh news, but I think in China, we are seeing.
The business continued to be strong powerful there continues to be decent it still continues to be strong improving since COVID-19. Yes every quarter. It continues to improve and so you know I think we're really bullish on China I think there is macro.
Theres macro factors that are completely outside of our control between the U S and China that.
Maybe I start to lose sleep over a little bit, but they are completely out of our control so but based on what we control and what we can see and what customers are actually doing with our technology. We are quite encouraged and we think the opportunities.
Still in front of us quite frankly.
Got it very helpful. Thanks, guys.
Yes.
And for the next question.
Dan Brennan.
Colin Please go ahead Sir.
Great. Thanks, Thanks for taking the question, Hey, Christian Hi, Susan.
Maybe just a Christian you alluded to a couple of times during the call, but just on the funnel itself.
So in the past kind of what kind of clarity you provide on it but just could you give a sense of.
What the funnel looks like today, maybe like customer segment and kind of how it's evolved over the course of 2021.
Yes.
First of all Dan Congrats on your new role, we're going to Miss Doug, but it's good to have you on the ball club.
The.
With respect to the.
With respect to the funnel itself, let's face it we haven't given a lot of color and I don't think we will give a lot of color because that.
That is that those processes internally.
<unk> are evolving and are being built and improving all the all the time, we spend a ton of time this year defining the funnel more creating a common language from which the salesforce can communicate with each other and with executives so that we get much better about <unk>.
<unk> accuracy, so that we can.
Although we can stand up in front of you and give you what we hope to be pretty reliable projections. The one of the things we've talked about for the first time kind of some of the segments market areas that we're focused on in a relative revenues.
Is that the company didn't have any of those capabilities and we had to come in and build build that and so at this time I really it's probably not appropriate for me to give you more color.
On the specific funnel other than the general.
General.
The general comment that the.
The increasing commercial footprint is true is directly impacting the quality and the size of the funnel.
Which does give us generally better visibility into the future than perhaps we had in the past, but but at any given quarter. Since instruments. There is still such a significant part of our quarterly revenues.
And there are quite binary because they are large dollar.
Numbers that could have an impact on any given quarter, but if you look out over time.
We're very encouraged what we see in the funnel.
There is very strong demand for these products and platforms. This will help us grow as we grow we will available improve our gross margins as we improve our gross margins will be able to get better leverage across the business and make that push towards ultimately getting to cash flow breakeven and better.
No that was helpful. Thanks, Christian let me, maybe just a high level one on kind of academic funding, obviously, it seems to be pretty robust from the headline figures and entering 'twenty. Two is that something clearly you've got a lot of growth levers at your disposal would.
Which you've discussed but is that something on top that youre seeing and all of your salespeople are seeing an impact from that just kind of wondering how that translates into the growth that we're going to see over the next 12 to 24 months.
It's interesting right because back in the day academic used to be.
All boats used to rise and fall with academic and we're much more balanced today with.
With academic.
And translational research and.
Customers like in VK pushing.
Pushing they're pushing their products, but we do see the academic funding environment as being.
Reasonably strong at this point and a good.
Providing us with a good opportunity set I think I think Americas are continuing to lead the way there.
There is.
Pretty reasonable amounts of funding, but it is harder to get to and where our footprint is still a bit too small and we need to we need to build on that pretty aggressively, but but on balance yes, I think the academic market is in good shape right now but.
But the beautiful thing for US is we've talked about for example, children's diversity of Kansas City, they've already sequence.
600 genomes.
And are continuing to grow and expand in accounts like that where they really are showing the power of long read sequencing are very very critical to our success as a company in and we're seeing them thrive which is great.
Excellent alright, thank you very much.
And we no longer have questions on the queue at this point I would like to turn back the call over to Mr. Todd Friedman for some closing remarks.
Thank you all for joining us today as a reminder, a replay of this call will be available on our website in the Investor Relations section as well as through the dial in instructions contained in today's earnings release.
Concludes our call and we look forward to updating you on our progress in the fourth quarter.
Yes.
And this concludes today's conference call. Thank you everyone for your participation you may now disconnect. Thank you all.
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Okay.
Thanks.
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