Q4 2021 Pacific Biosciences of California Inc Earnings Call
Good day, and thank you for standing by and welcome to the Pacific Biosciences of California, Inc. Fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer.
To ask a question. During this session you will need to press star one on your telephone. Please be advised that this call is being recorded if you would.
Acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your host today, Todd Friedman director of Investor Relations. Please.
Please go ahead.
Good afternoon, and welcome to <unk> fourth quarter and full year 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 in the investors section of our website at www Dot Tacb dot com or as furnished on form 8-K available on the Securities and Exchange Commission website at Www SEC Gov.
<unk>.
With me today are Christian Henry President and Chief Executive Officer, Susan Kim Chief Financial Officer, and Mark <unk>, Chief operating officer.
Before we begin I'd like to remind you that on today's call.
We'll be making forward looking statements.
Including statements regarding predictions estimates plans expectations guidance expectations for including advantage. It in connection with new products technology, and software development and launches and the anticipated timing of such development and launches expectations with respect to our product expectations, resulting from the consumer.
The building of the Hi Fi ecosystem expectations with respect to our partnerships and collaborations 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 fully described in our press release earlier today and in our filings with the Securities and Exchange Commission.
Claim any obligation to update or revise these forward looking statements.
The call. We will also present certain financial information information on a non-GAAP basis.
Management believes that non-GAAP financial measures taken in conjunction with U S. GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans.
Benchmark our performance externally against peers.
Reconciliations between U S GAAP and non-GAAP results are presented in tables within our earnings release and.
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.
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 <unk>.
I'll now turn the call over to Christian.
Thank you Todd and good afternoon, everybody. Thanks for joining us in 2021 pack bio underwent a remarkable transformation and before we get started with our prepared remarks I'd like to recognize and thank all of our employees.
They are the ones that have executed our strategic vision to make that transformation possible. Thank you. Thank you. Thank you.
On today's call I will start with a brief update on our fourth quarter performance next I will discuss how we executed on our strategy in 2021 to help build the foundation for long term growth I'll also spend a few minutes outlining our strategic priorities for 2022.
Then I will pass the call to Susan to discuss our financial results in more detail and walk through our full year guidance.
The fourth quarter marked the close of Pac Bio's, most transformative year in its history in.
In the fourth quarter, we achieved record quarterly revenue of $36 million or 33% increase compared to the fourth quarter of 2020, and our seventh consecutive quarter of sequential growth.
Q4 also wrapped up Pat miles most successful year with full year revenue of $135 million or 65% growth from 2020.
Driving our record annual performance is the increased adoption of the sequel, II and <unk> platforms, not only did we nearly doubled our installed base in 2021 customers from around the world are using the systems more than ever before generating the most accurate and complete sequencing data on the mark.
Right.
In the fourth quarter, we installed 48 systems, which is also an all time quarterly high and brings our total installed base to 374 units and 84% increase compared to the end of 2020.
What is encouraging is that over half of the system orders in the fourth quarter were from new Pac bio customers. This was the most orders from new customers that we've seen since the launch of the sequel to nearly three years ago.
Many of our shareholders have asked me how will know that our investments in our commercial infrastructure are paying off so I thought I'd give you a little detail to illustrate how the expanded commercial organization is beginning to make a difference.
Over the course of the year, we've been able to accelerate the number of new instrument orders received and recognized as revenue within a quarter. This metric is known as instrument turns for example in the first quarter approximately half our new system placements were from orders turned in that quarter by the fall.
Quarter, nearly 90% of our instruments returned within the quarter. This demonstrates that we're reaching more customers and converting their interest into sales faster than ever before.
This example, along with the fact that a sizable portion of our new instruments placed in Q4 or to new customers shows that our strategy to increase our global commercial footprint is beginning to drive demand across all of our markets.
Also encouraging is that over half of our new instrument customers are focused on human Germline sequencing for example, Cincinnati Children's Hospital purchased its first pack biosystem in the fourth quarter and is expected to use the platform in a broad spectrum of human research applications.
One of our strategic priorities in 2021 was to demonstrate the utility of hifi sequencing in clinical whole genome applications. Let me share a few of the recent highlights on how we progressed on this goal.
During 2021, we initiated collaborations with top tier institutions like Rady Children's Institute for genomic Medicine, and children's Mercy Hospital in Kansas City.
As a result of our collaborations both institutions have shared compelling data highlighting the benefits of long read hifi sequencing.
These collaborations are extremely important they can show the potential of longer he'd hifi sequencing technology to identify variants in areas of the genome that are difficult to sequence with short read sequencing technologies and ultimately increase the diagnostic yield for rare disease cases.
We believe that these successful collaborations will drive an inflection point in growth in adoption when we launch higher throughput systems.
And in the fourth quarter, we further expanded our collaborations.
<unk> laboratories for example will explore the use of hi Fi whole genome sequencing as part of the Utah DLC project, which is a project that aims to provide genetic diagnosis for patients in the neonatal intensive care unit.
Similarly, with UCLA health.
Searches will investigate the effective diagnostic yield on unresolved cases by combining full length isoform sequencing and long read whole genome sequencing on Pac bio instruments.
Grams like these are progressing not just in the U S, but all across the globe.
The care for Air Canada, Canada Consortium will reflects negative short read sequencing tests with Pacbio long read whole genome sequencing.
Qatar, we delivered two additional sequel to ease sidra, where they've been leveraging hi Fi whole genomes to better understand their disease.
In the Netherlands, we delivered two more systems to Radboud University Medical center, enabling them to further scale hifi sequencing for programs like the solve Rd European Research program.
<unk> has been using pacbio sequencing for several years and to paraphrase one of the researchers at the Institute the Hi Fi genome trios that have completed with Pac biotechnology to date are likely the most comprehensive they've ever had.
And the value of Hi, Fi genomes, and unraveling disease, causing previously hidden structural variance is becoming apparent now.
Another exciting program as a pilot study with genomics, England as you May know genomics, England completed a project with sequenced over 100000 whole genomes using short read technology, most of which for patients affected by rare diseases or cancer.
This program helped deliver actionable findings to many families roughly 75% of the rare disease cases are still unsolved.
Our pilot study, we will sequence samples from a subset of these unsolved cases, and our lab has already received the first batch of samples.
We're hopeful that additional insight gained during the study may ultimately lead to new therapeutic or clinical trial options for patients with rare disease. Our goal is to demonstrate the power of hifi sequencing to help these families find the answers.
Another strategic priority for the company in 'twenty, one was to both expand and accelerate our product development pipeline.
Expanding and accelerating our product development programs, we intend to offer multiple sequencing platforms to the market. So our customers will have the ability to leverage our technologies at price points and throughput levels that fit their research needs.
From a multi year high throughput development collaboration with <unk> to our acquisition.
<unk>, <unk> and <unk> and our recently announced desktop sequencer partnership with Berry genomics, we have transformed <unk> from a single product focused company to an organization poised to deliver multiple platforms in core technologies that reach all ends of the sequencing market.
But our focus hasnt solely been on new sequencing platforms. We're also very focused on developing end to end solutions for our customers.
For example in mid November we launched our first fully kitted solution.
Viral which was conceived developed and commercialized all within 2021.
This new can't provide sequel, II and TUI customers everything they need to sequence of the Sars Covid two virus.
The Hi Fi viral kit provides what we believe to be the most comprehensive view of the <unk> genome on the market today and due to its unique design kit.
Tact emerging variance without the need for a redesign.
With just a month and a half of sales in the fourth quarter. We've shipped the kit to 20 global customers and it was a key driver behind the placement of a handful of sequel to ease to public health labs during the quarter.
We see continued investment continued instrument demand from research customers, particularly public health labs interested in hi Fi viral and expect this to help lay the foundation for future development.
Moving onto 2022, you can expect Pac bio to continue building the ecosystem around hifi sequencing, which we will anticipate will result in the availability of a diverse set of applications focused on the customer.
We're working with organizations like the broad Institute to bring a single cell <unk> method to more pack bio users and with twist bioscience to develop kits around hifi sequencing in areas like pharma co genomics and targeted panels that explore the dark regions of the genome.
Hi Fi viral drove incremental sequel, II sales in Q4, a robust ecosystem operating application specific kits will be an essential driver of our future growth.
Last April we released our version 10, one sequencing kits that drastically improved performance speed and throughput on the sequel to wheat and <unk>.
Proves the preliminaries, allowing for more sub reeds increased hi, Fi data and cut DNA input requirements by threefold opening up more sample types to hifi sequencing.
This April we plan to launch another update to our library prep and sequencing kits for the sequel, II and <unk> platforms.
These kits will cut the upfront workflow time nearly in half require customers to order in store fewer materials and lower DNA input requirements even further.
We remain committed to streamlining our long read sequencing workflows, shortening time to answer and enabling our platforms to sequence more sample types in fact with the new sequencing kits, we anticipate that DNA input requirements for whole genome sequencing will be decreased fivefold relative to what it was.
Just one year ago to just one microgram for smart cell and Hugh human whole genome applications.
We're also working with Google Health to co develop deep learning methods based on their deep consensus algorithms to improve our raw base accuracy with small improvements to our raw read accuracy, we can shorten our run times increase our throughput and allow for even greater consensus accuracy.
But perhaps what I'm most excited about in the near term, though is the launch of our upgraded software plan for this April that will equip every sequel II system with on instrument methylation detection with no additional cost or workflow steps.
I'd like to take a minute to discuss methylation and why this new feature of the sequel, II and <unk> platforms is poised to provide our customers with even more complete information on every sample sequenced potentially unlocking greater biological discoveries.
As many of you know epigenetic changes are factors beyond the floodgates DNA sequence that can change the way genes are expressed methylation is one example of an epigenetic change it involves changing the chemical structure of a DNA base by adding a set of atoms called the methyl group.
Relation associated with silencing DNA can also potentially alter gene expression.
Over the past several years, our understanding of methylation and its implication on human disease has grown substantially for example, scientists are discovering that methylation patterns may play a fundamental role in the development of a large and diverse number of human cancers because of this we believe methylation sequence.
<unk> should be a critical component to genomics and biological research. It is an area ripe for more discovery and with the development of a better detection technology the <unk>.
Testing, both methylation and DNA sequence on certain other platforms requires cumbersome workflows and multiple sequencing runs as a result, that's a genome sequencing has been applied at much smaller scale than genome sequencing on other platforms with our software release, we believe Pac bio will be.
The only instrument provider at present that can offer simultaneous detection of both DNA sequence and methylation signatures with no changes to sample prep sequencing performance and at no additional cost or workflow steps.
Using this feature in early access research researchers at children's Mercy, Kansas City reported to us that they covered both a long repeat expansion and hyper maturation and the DNP caging from the sample of an individual diagnosed with the type of muscular dystrophy.
Further the team believes that directly and accurately connecting genetics and epigenetics with the same high Fi workflow could have significant near term applicability in medical.
So let's move to our short read sequencing by binding platform acquired through our acquisition of omnium in Q3.
Our product development program is on track as we shared last month, we successfully implemented a new clustering method that has enabled higher density easier workflows and even improved overall performance and accuracy. We are now consistently observing exquisite accuracy on our alpha systems with over 90.
Percent of the REIT at Q4 0 levels or above or one are in every 10000 basis.
We believe that this is more than 10 times more accurate than other sequencer specifications that have been announced to the market.
The team is working diligently to incorporate these advancements into beta systems that we expect will output greater than a 120 gigabits per flow cell. We expect these beta systems to be in customer hands in the second half of this year and launch globally in the first half of next year.
Now turning to organizational updates the integration of <unk> is progressing nicely.
We now have a growing R&D presence in San Diego and on the East Coast to Baltimore, Our Salesforce can now also directly sell our nano bind extraction kits to all of our customers around the world.
We have also completed our leadership commercial leadership buildup with the addition of laboratory and as general manager of the Americas and adjacent Kang as general manager of Asia Pacific.
We've also appointed Chris Cypert Pac bio veteran to lead a new function focused on customer experience I'm thrilled to have these leaders in our organization as they have deep customer relationships and decades of experience building successful sales and support teams.
With that I'll now turn the call over to Susan to discuss our financial results Susan.
Thank you Christian.
As discussed we are pleased to report another record revenue quarter in the fourth quarter 2021, with $36 million in product and service revenue, which represented an increase of 3% from $34 9 million in the third quarter of 2021, and an increase of 33% from $27 1 million in the fourth quarter of 2020.
<unk> revenue in the fourth quarter was $16 2 million, an increase of 2% sequentially from $15 9 million in the third quarter and a 19% increase from $13 6 million recorded in the prior year quarter.
We delivered 48 equal to in two weeks systems during the fourth quarter.
<unk> had 374 systems as of December 31.
Turning to consumables revenue of $15 million in the fourth quarter grew 3% sequentially from $14 6 million in the prior quarter and was up 49% from 10.1 million in the fourth quarter of last year.
Equal to in two weeks consumables represented approximately 82% of our total consumable shipments in the fourth quarter with the rest from older systems and other consumables.
Annualized pull through per system on the sequel to until we installed base in the fourth quarter with approximately 150000 as.
As a reminder, pull through per instrument is calculated by dividing our quarterly consumable revenue by the sequel to until we installed base at the beginning of the period.
Additionally, cultural figures include Hi, Fi viral, but exclude nano bind extraction kits in.
In Q4, we observed strong utilization across the installed base of sequel to in <unk> and the sequential decline in annualized pull through in Q4 was largely due to record number of installs we observed in Q3.
As well as some considerable warranty related replacement we made in Q4.
Finally service and other revenue grew to $4 8 million in the fourth quarter compared to $4 4 million in the prior quarter and $3 5 million in the fourth quarter of 2020.
Our service revenue growth reflects the growing installed base of sequel to until we.
Shifting to our revenue our regional view America's revenue of $18 7 million in Q4 grew 54% compared to the fourth quarter of 2020 with a record number of instruments shipped in the quarter.
Moving to Asia Pacific revenue of $8 3 million, reflecting 5% growth over the prior year period, largely due to the strength of multi instrument orders from multiple customers in the fourth quarter of 2020.
A particular note Japan, a strong performance in the fourth quarter of 2021 that included a sequel to a shipment to the university of the Rio Qs, which will use hi Fi in its pilot Pan genome project. This pilot may potentially open up a broader program looking at genomic diversity within Japan.
Jean support.
Does highlight the growing demand for hi Fi sequencing in the region and the Switzerland based company is already marketing a catalog of hi Fi sequencing offerings to scientists and researchers across Europe .
From a segment market perspective for the full year 2021, human Germline applications represented approximately one third of our business and what's the fastest growing application.
Our next largest market with plant and animal about 30% of billings, followed by infectious disease in microbiology at over 20 per cent.
The remaining comes from oncology and emerging applications.
Moving down the piano as a reminder, starting last quarter, we began showing both gap and non-GAAP results for gross margin operating expenses and net income or net loss.
I encourage you to review the gap reconciliation of these non-GAAP measures, which can be found in today's release for more information.
Gap gross profit of 15.8 million in the fourth quarter of 2021 represented a gross margin of 46 25 per cent.
Excluding amortization of intangible assets fourthquarter, 20th 21, non-GAAP gross profit of $16.9 million represented a gross margin of 47.1% compared to non-GAAP gross profit of $15.7 million or 44.9% in the third quarter of 2021.
Moving on GAAP operating expenses were $81.4 million in the fourth quarter of 2021, which included 1.6 million expense from contingent consideration remeasurement merger related expenses and amortization of acquired intangibles excluding.
Excluding these expenses Noncomp operating expenses in the fourth quarter totaled 79.9 million up 35% compared with $59.1 million in the third quarter, and 126% higher than $35.4 million in the fourth quarter of the prior year.
The increase in operating expense compared to the previous quarter and last year was primarily a result of higher headcount related spend in our R&D and commercial organizations and a full quarter of expense associated with omnium operations.
In terms of head count we ended the quarter with 728 employees compared to 412 at the end of 2020.
Gap and non-GAAP operating expenses in the fourth quarter included a total non-cash stock based compensation of 17.5 million compared to non-GAAP stock based compensation of 15.1 million in the third quarter of 2021 and $4.8 million in the fourth quarter of 2020.
GAAP net loss in the fourth quarter of 2021 was 69.3 million or 31 cents per share.
Excluding income tax impact, resulting from acquisitions change in fair value contingent consideration merger related expenses and amortization of intangible assets non-GAAP net loss with 66.4 million and non-GAAP net loss for sure was 30 cents compared to a non-GAAP net loss of 47.2 milk.
<unk> and non-GAAP net loss per share of 23 cents in the third quarter of 2021.
And a non-GAAP net loss of 23.1 million or non-GAAP net loss of 12 cents per share in the fourth quarter of 2020.
Now turning to our balance sheet, we ended the fourth quarter with one point O 4 billion in unrestricted cash and investments compared with 1.08 billion at the end of last quarter and 319 million at the end of 2020.
Inventory bounces increase in the fourth quarter to 24.6 million, representing 3.6 inventory turns compared with 18.3 million at the end of the third quarter of 2021, representing 4.2 inventory turns.
Accounts receivable increase in the fourth quarter to 24.2 million, reflecting a D. S. L 62 days compared with 23.9 million at the end of the third quarter of 2021, reflecting a D. S O a 58 days.
Longterm deferred revenue grew approximately 6.6 million in the fourth quarter to a balance of 25 million.
The increase largely reflected the cash received from a V T. As part of our collaboration agreement to develop an ultra high throughput sequencer.
Now I'm moving to guidance.
For the full year 20, twenty-two we expect revenue in the range of 160 million to 170 million, representing a growth rate of approximately 23% to 30% compared to 2021.
In January we began to see lower utilization largely due to the impact of COVID-19, and associated quarantine is flowing lab productivity and in some instances preventing lab access.
Additionally, COVID-19, coupled with the recent macro environment has resulted in some potential delays and capital purchases in the first quarter, particularly in a meal.
As a result, we expect Q1 20 twenty-two revenues to be in the range of 31 to 34 million.
At the midpoint this represents approximately 12% growth on a year over year basis.
Looking forward to the rest of 2022 as the impact of COVID-19 decline, we expect that global activity will accelerate and positively impact our growth.
In addition, we have also radio received positive feedback from customers on the upcoming enhancement to the sequel to to a password we plan to launch in April .
He says hansman, coupled with a commercial investments we've been making are expected to drive additional customer instrument orders and utilization throughout the rest of 2022.
Moving down the piano, we expect 20 twenty-two gap gross margin to be between 44.5% and 46.5% on a non-GAAP basis, which excludes the amortization of intangible assets, we expect gross margin to be about 45% to 47% with improved leverage from.
Hire a manufacturing volumes, partially offset by higher supply chain costs.
For operating expenses, we expect a four year to be between 350 million and 360 million the.
The growth here over a year reflects a full year of expenses related to our acquisition of omnium that close in September of 2021, Annualization of 2021 hires and an increase in R&D expenses to continue progressing on the development of our next generation platforms.
We expect interested in other expense to be approximately 15 million for the full year, reflecting interest expense and amortization of debt issuance costs for a convertible notes issued in 2021.
We expect a weighted average share count for purposes of E. P. S for the full year to be approximately 225 million chairs.
With that I will turn the call back to Christian Christian.
Thank you Susan in summary, I'm pleased with our performance in 2021, as we execute it against the strategic priorities that were set forth at the beginning of the year.
First we dramatically expanded or commercial presence, we have more than doubled the quota carrying sales reps from the start of the year.
The on board of the best in class leadership team and are completely revamped it completely revamped our marketing efforts and commercial operations processes.
To support our growth.
Second we drove product development with multiple platforms supported by different long and short read chemistries across the throughput spectrum, coupled with a novel Lori D N a extraction technology and growing bioinformatic capabilities 2021, and set the stage to bring industry changing technology in the years to.
Come.
And third a laundry technology leadership in clinical genome sequencing, while still in its infancy has demonstrated time and again that it has the potential to deliver a life changing results to families around the world.
In 2022, we expect to achieve another year of record performance. Our strategic focus is centered on driving product development toward the launch of both long and short replatformed optimizing the productivity of our newly built commercial organization and continuing to demonstrate the power of highly accurate sequencing.
With our industry, leading hi Fi technology.
In closing I was happy to see the nature technology featured fully finished genomes as one of its seven technologies that look to shake up sciences here la.
Looking back at 2021, one crucial revelation that came to the forefront of genomics world. If that were there are still hundreds of millions of basis missing from the human reference genome. It was like reading a book with whole chapters missing Pac Bio Hi Fi was a key technology for filling in those missing chapters.
We are increasingly finding that sequencing genomes of native and longer stretches is unlocking more discoveries in answering more biological questions.
With our technology and development, we believe it's not if but when hi Fi sequencing becomes the defect is standard in translational research to fully characterize all classes of genetic and epigenetic variance across the complete genome from to you I'm here to tell them here.
And with that I'd like to open the call for questions operator.
And thank you.
As a reminder, asked a question you'll need to press star one on your telephone to Redraw. Your question first the donkey.
And we please ask that you limit yourself to one question and one follow up again. This one question and one follow up please stand by we compiled the Q&A roster.
And our first question comes from Kyle Mikes and Canaccord Genuity. Your line is now open.
Hi, guys Yep.
Hey, guys home. Thanks for taking my questions Congrats on the corner and the transfer them review of course.
Just kind of turned to the guidance, though so the 22 guide and the phone queue guide below the street and your reference of things that we didn't hear from your for your last week, the lower January utilization due to COVID-19 and some of the delays.
So I I just wanted to know if you guys can kind of walk through that with a little bit more.
Detail of a kind of a refined point of clarification, possibly like I'm. Just wondering if that's mostly the the smaller installed base. Obviously the commercial team is growing the overall revenue base is kind of you know it's relatively.
It come from a lower starting point, obviously are you expecting any of these places to kind of come back later in the year it'd be kind of talk about those factors and and what contributed to the kind of.
You know relatively you know we could I guess first half from first quarter foreign Chubby regimentation at least that'd be really helpful. Thank you.
Yeah. So thanks for the question calls so there's a lot there's a lot to unpack there if we start with the consumables. We we you know we ended the year end consumable you know consumables, where utilization was starting a bit of a downward trend, but not not not very cigna.
<unk> and we were obviously achieving record revenues, but as we looked at the results for January and all three of our primary territory's we started to see some declines in utilization with respect to consumables and as we dove into it in early February yeah.
He noticed the conversation was that we still see COVID-19 , having a bigger impact than <unk>.
Frankly, I would have expected but.
But the reality is is that given the fact, we have such a smaller revenue base fewer customers and more than you know customers that are more sensitive we feel the effect of that you know more fully we do believe though that that we do that utilization will return to more normalised levels.
And continue to grow and as a result, that's why we gave the annual guidance of 160 to 170.
Revenue on the instrumentation side, what we're seeing is some of our smaller customers are being impacted by this macro environment in other words. It is the funding environment for kind of new companies and companies that are perhaps maybe have gone recently public.
With the recent declines in volatility in the market have gotten more conservative about their spend and it's not that they're spend is going away, but they are definitely being more thoughtful about how how fast and how much scale. They they scale into the business and so then I think we're suffering from both of those.
Affects the final thing I'd say is with respect to Covid itself. What's interesting is that our business is much more academically focused in project base based as opposed to being commercial business such as clinical operation and as a result, you know a lot of those cuss.
Immersed or have been either working for home slowly slowly the start of their projects and the new year, well omicron run.
Run its course, particularly in the United States and so I do think that that is having an impact on our two one.
But we are we to do feel good that it's going to recover and you know where it's going to set us up for a strong year, but we are looking at the data for the first six weeks of the year.
We felt it was responsible to kind of put the first quarter out there and and benchmark from there so hopefully that helps a little bit.
Yeah that was that was great Christian Thank you for it I mean, it's it's fair me kind of confirms what I was immortal, it's kind of getting through with the what the question some of those points, they're sort of illustrate this for for a follow up kind of unrelated I I I know you guys weren't with a company at this time, but I figured I would just come close cause we're kind of course not.
Close to that spot basically I was wondering if you had any sense 40 impact on Pac bio in terms of nuclear for acquisitions or utilization when the primary.
Linked to Hungary business left the market in like the early mid 2020 kind of time frame.
Back then I didn't ask the question and it didn't really come up I mean honestly the company was coming off for you I'm Gonna murder attempt in management kind of shot down to use synthetic approaches over the years. Prior so I'm just curious, though what the overlap with like if at all between the link reviews or as in the Pac bio native longer users and you know it's.
At the very least because again I understand this is tough given refer readers past that it would be great. If you could talk about the overlap you would expect occurred between the two technologies in terms of applications and users if he could that that'd be great. Thanks, Yeah. I mean, it's it's a tough question to answer because none of US were here back in 2020, So I don't have any.
Real frame of reference there, but what I do have is a frame of reference is looking at looking at the business today and talking to several customers over the past.
Four weeks or so.
As the linked long read.
Story is starting to emerge and what what we're finding is that customers that are using our technology.
Clearly not not not interested in switching to synthetic long read in other words shortly sticks together to make a pseudo long read. However, there are customers that that that are going to be that our new customers.
We'll.
We will consider looking at the obviously will look at all of their options before they make buying decisions and you know the one thing. That's interesting is I I think our new got our funnels for new customers, a new customer acquisition still a larger than they've ever been in the history of the company and so I don't I don't believe that that's having a.
Significant impact on our business.
Today or do it nor do I expect it to have a big impact on our business over the over the course of the year. So from my perspective.
Don't really know I don't really have an appreciation for the past, but when I talk to customers today, most customers understand the benefits of native laundries, they understand the power of Hi, Fi and the completeness and the accuracy that you get when you use hi Fi technology and they.
And they generally are in favor of choosing that so well, obviously see what happens but.
We're feeling very good about our position with respect the technology.
Perfect. Okay. Thanks for that uhm, thanks to answer the questions I'll leave it there I appreciate it.
Thanks Scott.
Thank you and our next question comes from past Savant for Morgan Stanley .
You're lying is not open.
Hey, Guy Who's good evening and thanks for the time here, maybe I'll I'll start with one of the guide as well Christian or or perhaps even Susan I mean can you just walk us through some of the embedded assumptions here Susan in terms of sharp instrument placements and how you see the consumable trends evolving from that <unk>.
Hundred 50 K level.
Yeah, So maybe I'll take that one so when we when we look at you know kind of underlying assumptions one of the first underlying assumptions is that there are no significant deals in the forecast deals that would be population seats scale now there are several of.
Those opportunities out there in the world that we're pursuing and so if we if we achieve one of those <unk>.
Projects, it's highly likely we ended up we ended up.
Doing better than our guidance, but we felt it prudent at this time, because those deals or a periodic and we don't know when when they will happen that we would leave.
Leave those as as opportunistic upside through the company. So that's the first thing with respect to consumer will pull through we do expect pull through to come down and Q1, because we're seeing lower utilization in in January and so we would expect it to come down relative to Q4 levels and.
Then as as Covid wanes and customers start using their systems, it's likely that it will turn the corner and head back up but of course that will be somewhat mitigated.
Or or you know countered by the fact that we are placing a lot more instruments every quarter and those instruments have.
Fairly long Naptime and we're required so many new customers that the ramp time to getting up to full speed is in fact.
Longer than what we would typically see so if we have a new if we have an existing customer. We're we're adding capacity you know those those capacity ads are pretty straightforward and it becomes you know.
The past increasing utilization and pull through is limited by samples, but but typically those samples are not far away if they buy new equipment.
If it's a new customer you're you're both helping them develop their work flow and they're acquiring the customer they're acquiring.
Samples they need to run an ongoing business and so as a result that that whole through it takes longer to evolve and so if we look at it on balance.
Do think consumer.
Consumer will pull through will improve but it will be dependent on obviously, the the everyone getting back to work so to speak and.
The ratio or a mix of of new customers that we achieve in every.
Every quarter.
Got it that's helpful question.
And then a quick follow up on on I'm, just the instrument cadence here in the uplift you're expecting in the in the back half of the R. So there's a couple of different dynamics that come to mind rape, you've you've spoken about the sequel to improvements that you're launching in April I'm not sure. If those include the new library prep in sequencing gets as well.
But that was I think on track for the first half of this year as well. So you have improvements to the current portfolio on the other hand, presumably you've got these some of these synthetic long read approaches you're from the competition potentially coming on line in the back half of the yard and and it also gets you closer to your own next iteration of the <unk>.
So to speak which might sort of throw a wrench in the works in terms of our customer evaluating new purchases to walk us through the bushes and throws there and what you're going to do to make sure that the market doesn't freeze up a little bit ahead of those dynamics.
Well I think the first thing we're gonna do is continuing to demonstrate our commitment to improving the sequel to platform and with the two we and and then the new improvements coming in April we think that gives us a lot of momentum and if we look at if we look at our actual instrument tunnels right now even at today on February 15th.
There there is strong or stronger than they've ever been in the history of the company and so it's a question of getting getting those customers basically showing the customers the improvements and why making an investment now in the sequel to for a platform is a valuable investment for them and helps propel there so.
<unk> and how we will be with them as good partners every step of the way of course as you go deeper into the year you know, there's a lot of emerging.
Priorities and competitors that are that are coming to market goes wrong, both both synthetic and and new shortly competitors as well and so you know customers have more more choice than ever and I think what what's going to be important for us to keep driving the instrument demand is.
Emmett straight into the power of Hi Fi demonstrating the fact that now that you have a fight sequence or the <unk>.
Sites that you can get I mean, just from the first runs their children's Mercy did you know they they.
They they were sending emails to me and and our team talking about all of the great new things that they can do which we can translate into new applications, which we can drive deeper into the market, which will accelerating create the flywheel to create more demand. So I think I think.
The first thing you have to do is continue to demonstrate your value proposition and I think ours is extremely compelling right now we have the most accurate most comprehensive sequencer on the market.
We're making it even more accurate and more.
And more useful with methylation the on the workflow side with simplifying the work flow and and all of these improvements are coming in April so that gives us plenty of time to.
Leverage these improvements to drive demand throughout the year and.
So for US we're thinking holistically about the whole work flow sample to answer.
We're thinking about core improvements to the technology itself and all of these improvements are coming to market or enabling more <unk> more examples to get onto the sequencer now now will be down to one microgram for whole genome applications.
Of the input TNA, which to start it's continuous everything we're doing is opening up the market to more and more samples to drive a more compelling value proposition and to give our salesforce.
Which is now and they're really great spot the ability to kind of leave my instruments and so I think I think that's where we have to focus first down.
Down the road.
Deep customer relationships is it is about making sure that your customers always feel like they're getting maximum utility from their relationship with Pac bio and so if and when new platform start to get to market. You can be assured will be working with those customers in a way that.
Makes them excited to be part of the pack by a family.
Got it helpful. Thank you.
Yeah.
And thank you.
And our next question comes from Tycho Peterson from J P. Morgan Your line is now open.
Hey, good afternoon.
Estimate afp's came down in the fourth quarter can you comment was that kind of public health lab placements or is there another dynamic going on it and how are you thinking about it from an ASP for this year.
Yeah take though that one of the one of the drivers of that was public health Labs, We did we did run a.
A program so that we could help public health labs, yes, hi Fi viral capability sooner rather than later than that had some impact we're also.
We are very very focused on driving instrument placements across.
Cross the around the world and so that has a mix of his teeth, whether it's multi system deals or or specific situations say, where we're trying to drive penetration into say new geographies or.
Just expand the installed base, so that we get more people using laundry technology as we look out into 2022.
You think.
Will be valuable and there'll be dependent upon kind of some of the factors that I outlined but I think they'll probably bouncer they'll really bounce around depending upon.
The scope and nature of the deals.
You know that we do in terms of our customers scaling. So for example.
If a major customer decides to do some major scaling I suspect, you'll probably see some nasty.
Impact from that in that particular quarter, but at the end of the day for US right now our focus is really driving.
Driving the installed base, because obviously that also sets the stage when new platforms come to market you have a <unk>.
Captive opportunity to sell into those customers.
Okay.
Omnium I appreciate the color you provided 90% of read the queue 40 can.
Can you talk about plans timing for getting customer data could we get that in the back half of the year with some of those beta placements, what's the latest thinking on price per gig and then it didn't look like there was an accounting adjustment contingent consideration for just over a million dollars on the fair value of his process R&D can you maybe just talk to withdraw that.
Yeah. So first let me start and pass the Baton to Mark Hill, He can talk a little bit about.
Kind of some of the timing associated with the omnium cause he's.
It's he owns that project I guess I don't all the projects ultimately, but and then maybe Susan can address the process Iron D. It's pretty simple so mark you Wanna take a stab at that.
Yep, it's a Christian so.
As we mentioned taken we're going to continue to push on the development here for the next couple of quarters, but we do expect to be getting into beta testing the backup of this year.
Already really some customer club ratio settles in house, and so I would expect even in advance of us formula getting into a beta program that we will be sharing more or customer nor customer data that regenerated with them.
But <unk> as we pushed through the back end of this year and get ready for the first the full commercial launch and and the first of 23 will be it will be showing more of of that and I think it's really important for people to be able to have that opportunity to assess the accuracy that we're providing with SDB versus other emerging STS players as well as chemistry.
And others that are going to be demonstrating their their utilities about half of this year.
And then tightened price per gig Mark.
The price per gig tomorrow before we headed over Susan Yes, sorry, we haven't we haven't addressed the formula yet, but expect us to be comparable with other mid throughput platforms and in my mind. This is a mystery platform at lunch.
Okay, and typo with respect to the contingent consideration remeasurement. So as you know there was a milestone payment is part of the acquisition of omnium that milestone payment is held up on the balance sheet and I think it closer to product launch as we see positive momentum you'll see some of that expense.
Get transferred to the piano and so the reason we had this 1.1 million dollar expenses because we saw a positive result in terms of our development activities with respect to that product launch.
Okay, and then last one Christian just.
Competitive dynamics I appreciate your commentary on synthetic want reached before I mean, as we think about some of these newer entrants including element loop. I mean do you think this is market expansion here with with new players coming into the market.
Well I think.
I think that.
On balance the.
A market as large and growing and there's room for lots of players. So I think it's market expansion.
But I also think that I'm still a firm believer that that synthetic laundries are stitched together short reads.
Are are are not really a solution for critical clinical sequencing.
It's just not when you can you know when you get more information out of a native long read whether it's us or any long read native laundry.
Player, you're just going to have a more comprehensive view you can resolve more biology, and if you can do it economically there's no reason to scale too.
Stitch together short reads and so from my perspective.
Yeah.
I don't think that this is.
This has a material impact on our future, but you know for the occasional occasional.
Occasional customer that may other shortly sequencer that may want to do.
They want to do some a little bit of longer at sequencing. It at less than 10-K, B or 10-K, B I guess, perhaps.
You know I could see that as those those getting them inspired about laundry at all gives us an opportunity to sell into those customers when when they start to get serious about hey, we really need to integrate laundries in a very serious way into our.
Into our science and our workflow so from that perspective, it will expand our market to be sure.
Okay. Thanks.
And thank you.
And our next question comes from Dan Brendan from Calvin.
Your line is now open.
Great. Thank you thanks for taking the questions Christian Susan and Mark maybe the first one.
I know Christian you talked about a record backlog are you willing to provide any color on.
On a backlog maybe have a compared to last year and any help on kind of have a split of that backlog occur.
[noise] occurs across the four different segments, you discussed and then I mentioned on the commercial team to discuss the total employee headcount, which went up a lot, but you also discuss the ability with new customers the training that needs to occur in order to get them up and running I'm wondering could you give us some color about the external commercial team and maybe the internal team and where that same today another.
Are there plans and 22 to significantly expand that to meet the demand you're saying.
Yeah. So so that takes for that first I don't think I ever said that we had record backlog and so I don't know if you heard that incorrectly, but I don't I don't think we talked about backlog quite frankly at all in the entire call.
So anyway, bono sorry about that.
Maybe it was that in my notes on it yeah.
Yeah, so that's different than backlog I'd like to have that entire funnel in backlog of course, but that was the final. The final is of course is all of the people all of the customers that have expressed interest in in the products and are interested in buying either either the <unk>.
<unk> are going to becoming part of <unk>.
Looking for service labs, together to get our technology going and basically we characterize that funnel. According to where we think they are with respect to stage of sale and the ones at the end are the ones that actually get into the forecast and then we close on those and we are we have.
Exactly we spent 2021 working on building those funnels driving driving demand I. It was.
It was very surprising to me at how little outreach. The company had done before I joined the company with respect to trying to reach customers across all the different geographies.
I approved a job offer today just today for I think it'll be our first first head count or at least the only I can we have in Australia for example, and so hopefully that that will turn into.
Someone joining the team there, but that so that's what that's what I mean by our funnels are bigger than they've ever been in other words, we're seeing more opportunities there's more excitement the utility of hi Fi sequencing. The completeness the ability to call methods C is gonna is really going to help drive demand. So all those things.
Drive a tunnel with respect to head down I don't have the specific.
Sales headcount in front of me, but we more than doubled.
More than doubled our sales force in 2021.
So I think we have almost 50 not quite Ah direct direct.
Sales reps in 22, we're gonna continue to grow the salesforce really focusing on quota carrying.
Sales were up so folks that can.
That will have quotas and we'll be we're accountable to meeting the customers will also be growing our ability to serve the customers. So the customer support and and field application specialists, particularly outside the United States.
In areas, where we've just had been under represented so we'll be focusing there but for the most part most the heaviest lift was done.
In 21, and so I'm really happy with that because you know.
That was really important to set the stage to drive long term growth and now.
Now, it's a question of filling in around the edges.
And then getting after it and making it happen so hopefully that that helps them.
Yeah, sorry about that and then and then there's a follow up maybe two parter just pop seek I'm, just wondering where where do we stand with all of us in the U S. I know there are some betas or kind of smaller subsets being done along with do you have any viewpoint towards when that could expand.
Possibly in the U S and you know you have the.
Discuss some news with Joe just wondering kind of which peaked in for those 22 and what the upside is and then related to an earlier question. So.
We will get some color on the follow up but just wondering baked in within the full year guide between instruments and consumers you haven't you haven't given kind of a number or a range between how those two segments will break out for your for your guidance heavy or are you willing to do that.
We did not give specifics about the composition of the revenue at this <unk> at this point and I suspect we will give more color as we get deeper into the year about how that will go we talked that we did talk Susan did talk about.
The back half of the year being stronger than the front app and obviously.
With our immediate.
Immediately headwind with Covid here.
That seems pretty obvious probably at this point, but we do see the total business growing in our our objective is to grow instead.
Installs grow our installed base.
And of course as as these all of these installed that we did in 21 as well as what we'll do in the early part of 22, they'll they'll all have a compounding effect on consumable revenue as as those systems get up to speed and fully running and so we do expect to grow across the board for the year, but we didn't give.
Specific any specific numbers and at this point in time I think it's better we we wanted or how we're doing and how that how that will transpire and give more color as we get deeper into the year.
With respect to pop seek the the all of this program is actually here.
We are a small part of that program today with one with a key customer.
Quite frankly running at full speed and so we're seeing lots of samples go through that right now we.
There is lots of opportunity to expand all of US and there is talk about expanding that program for long reads more we'll see what transpires. We have not included any of that in our.
Forecast for the year more we included a significant expansion of gel.
And so most of the really large kind of binary on off type projects. We have kept out of the forecast because we're really focused on you know.
Achieving a meeting our base business objectives across the entire installed dates around the world.
And doing what we say we're going to do.
Every single quarter, and then as these opportunities emerge of course, we're going after them and we're trying to cultivate them in fact.
And as they come and they come to fruition. Then we will then that will give us opportunities to grow even faster. So that's how I look at it.
Great. Thanks Christian.
Yeah.
Thank you.
And follow this is gonna be our last question coming from Ross Osborn from Cantor Fitzgerald.
Mine is now open.
Hi, everyone. Thanks for doing my questions.
So just going back to guidance and then again with you know the gross margin. If he came in a couple of hundred bps has a street for the fourth year, but I believe you started calling out some supply chain headwinds on a three to call can you quantify the impact on the fourth quarter and then what you are saying this year, just kind of giving them poetry Guide and then I'll go to Africa.
Question, just how comfortable you with current inventory levels Uhm, given us headlines and then estimated customer demand. Thanks.
Yeah, Hey, Susan why don't you whenever you address the.
The gross margins.
Happy too so in queue for we started to see some of the impacts from higher cost due to global supply chain constraints, but it didn't have a material impact I would say it was half a percent in queue for looking ahead into 2022, we do expect the impact on our gross margin to be.
Higher what I had indicated previously I said, one to two points of margin in 2022, I think it's going to be at the higher end of that range just given the nature of some of the cost pricing, but what what is good is that where our procurement team is being very proactive about ensuring that we get the components, we need to be able to me.
Demand so from that perspective, we're doing very well, but it it does come with a cost.
Yeah.
And when you think about kind of building up inventory to serve customers. One thing that I've asked the team to do is build up.
Some more smart sell inventory than we normally otherwise would normally carry and the reason for that is if if.
Parts of our team.
I've got Covid, and we couldn't manufacturer for awhile I want to make sure that we don't have any supply disruption in the team's responded beautifully to that and you know.
The purchasing group doesn't get enough credit quite frankly, they've secured.
Asked majority of supply required to manufacture what we see as the demand for smart cells over the course of the year on the instrument side. It is a bit more hand to mouth in the sense that we're fighting for for the same fpga's and other Ics that other companies are but.
So far it hasn't had an impact on our business and.
Looking ahead in the mirror in the near term it doesn't look to have a significant impact the team has been able to manage.
Manage that risk appropriately. So it is something that we're looking at every single day and.
Making sure that we could serve all of our customers around the world and the best way that we can.
Got it thank you.
Thank you.
And thank you and now I would like to turn the call back over to Christian Henry for closing remarks.
Sure. Thank you. So let me just wrap up and thank you everyone for participating today, we had a great year in 2021, and where we put the complaint in the best position and its history to have another record setting year of 22. The year. So far has gotten off to a bit of a slow start given what we see.
To be some COVID-19 headwinds, particularly on consumables and we're working through that week by week, but we do expect ask COVID-19 starts to wane that demand will accelerate our activity will accelerate which will drive further demand and so we just want to thank everyone on the call for your <unk>.
Port and we look forward to outfitting everyone as the year progresses. So thank you very much.
And thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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