Q1 2022 Pacific Biosciences of California Inc Earnings Call
[music].
Good day and welcome to the pack bio first quarter fiscal 2022 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please take the old conference specialist by pressing the star keep all about the Iraq.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note that this event is being recorded.
I would now like to turn the conference every type Friedman director of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to <unk> Bio's first quarter 2022 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 P ACB dotcom or as furnished on form 8-K.
<unk> available on the Securities and Exchange Commission website at Www SEC Gov with.
With me today are Christian Henry President and Chief Executive Officer, and Susan Kim Chief Financial Officer before we begin I'd like to remind you that on today's call, we will be making forward looking statements.
Clothing statements regarding predictions progress estimates plans and expectations intentions guidance expectations for including advantages and capabilities in connection with new product technology, and software development and launches and the anticipated timing of such development and launches expectations, resulting from.
Continued building and enablement of a hype by ecosystem expectations with respect to our partnerships and collaborations.
Estimates intentions and plans to use the company's cash and investments to fund current development and commercialization initiatives until achieving positive operating cash flow without the need to raise additional capital and other information you should not place undue reliance on forward looking statements because they are subject to assumptions risks and.
Ts and couldn't call it and could cause actual outcomes and results to differ materially from currently anticipated results, including challenges inherent in developing manufacturing launching marketing selling new products and achieving anticipated new sales.
Competition unanticipated increases in costs or expected interruptions or delays in the supply of components or materials for our manufacturing of Pac bio products and products under development potential product performance and quality issues and potential delays in development timeline the impact of the COVID-19.
Pandemic and risks associated with international operations, among others. These risks and uncertainties as well as other risks and uncertainties are more fully described in our press release earlier today and in our form 8-K Form 10-Q, and Form 10-K, and other filings with the SEC, we disclaim any obligation to update or revise these forward looking statements.
Sept as required by law.
During the call. We will also present certain financial 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 to benchmark our performance externally against competitors reconciliations.
Between U S GAAP and non-GAAP results are presented in the tables within our earnings release.
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 call.
I will now turn the call over to Christian.
Good afternoon, everybody. We appreciate you joining us today as we discuss our results for the first quarter of 2022, and our outlook going forward.
As usual I'll walk through some of the business and commercial highlights and then Susan will walk through the financials and guidance in more detail and then we'll open it up to Q&A.
I'd like to start by saying there are three key takeaways that I hope you come away with from our discussion today first we are executing on our core objective of rapidly expanding the installed base of sequel to in two weeks systems as evidenced by us achieving another record quarter of instrument shipments this growth in our <unk>.
Stall base will enable more hi Fi data.
<unk> the market.
Second we are making excellent progress on our next generation of short and long read sequencing, our mid throughput short read SBB instrument is on track for commercial shipments in the first half of next year and we continue to believe this will be the worlds most accurate short read platform.
We're also achieving our internal milestones towards the development of our Nexgen long read sequencing.
And third Pac bio is in a strong financial position based on and based on our estimates we intend to fund the company's current development and commercialization plans using the cash and investments on our balance sheet until we reach positive operating cash flows without the need to raise additional capital with.
The volatility in the equity markets today, this puts us in a unique and desirable position now.
Now, let's walk through our Q1 results and discuss how the team is on track to execute on our 2022 plants.
The first quarter was a solid start to the year end and the upper end of our guidance range with revenue of $33 2 million, a 14% increase compared to the first quarter of last year.
Given our revenue in the first quarter, we expect to continue full year full year revenues at approximately $160 million to $170 million for 2022, or 23% to 30% breath, Susan will touch on that later.
As we discussed on our last call first quarter revenue was lower sequentially due to the COVID-19 related headwinds that disrupted our customer operations and our internal teams ability to act interact with customers. Additionally.
Additionally, typical first quarter seasonality was exacerbated by macroeconomic headwinds that delayed some capital purchases. Despite these headwinds I'm pleased to share the team delivered another record instrument quarter with 50 sequel to in TUI placements. This.
This is the third consecutive quarter of record sequel to two replacements and over one third were to new pack bio instrument customers, which continues to underscore the expanding value proposition of hifi sequencing.
New customer applications range from gene editing to plant and animal to reproductive health and other areas.
We are gaining momentum in placing systems driven by our increased commercial presence improved sales productivity and significant product enhancements. We started our aggressive investment in early 2021 and since then we've shipped more sequel to in two weeks than in the first two years of the platform launch.
Our investment in expanding our sales force mainly to lower revenue per sales rep. In the short term as new sales reps are spending significant amounts of time prospecting for new opportunities. This is a crucial step in building a sustainable sales pipeline in each territory. We believe this is temporary and as our.
Installed base grows it will drive consumable growth and expand the revenue per rep over the medium term <unk>.
Additionally, as consumables generally carry higher gross margin than instruments. We will also benefit from gains in gross margin as our product mix changes.
But revenue per sales Rep is only one metric to drive sales productivity and we've made excellent progress in improving the velocity of our sales cycle. For example last quarter. We discussed our instrument turns metric to understand sales productivity with over 90% of our instrument shipments in the quarter from current quarter.
Sales.
That trend continues as nearly all of our instrument shipments in the first quarter were turned within the quarter.
Additionally, we are pleased to share that we delivered 18 additional sequel II systems to the broad Institute in the first quarter.
Their investment in <unk> technology positions them to address a breath of whole genome transcriptome sequencing research initiatives with the largest installed base of sequel to ease in the world.
To further expand the range of addressable applications last month, we launched significant enhancements to the sequel to an <unk> platform and we couldnt be more pleased with the customer reception of our new products allow the detection of DNA methylation directly on the sequencing instrument with no added workflow step.
Sure cost a library protocol and on instrument analysis support for recombinant Edina <unk> associated virus or AAV genome sequencing for gene therapy research applications.
Significantly simplified library prep processes lab technicians can now go from DNA to sequencing in one shift and hi Fi whole genome sequencing requires even lower input just one microgram per smart cell.
The new processes are also much more scalable and enable customers to run at higher throughput.
We believe our DNA methylation operating we will have a large impact in the field of epigenetics epigenetic differences in DNA methylation explained trades just as genetic differences in DNA sequence data and hifi sequencing now simultaneously characterizes both the genome and epigenome from a single sequel.
Library in a single run approaches to measuring the epigenome with short reads like whole genome bisulfite sequencing need special Sanford mission several special sample preparation with separate sequencing runs for the genome and epigenome, which adds cost and time.
And they don't address the whole genome.
Other long read technology failed to match Hifi sequencing inaccuracy, particularly for insertion and deletion variance and for separating and phasing the two allele.
And require complex analysis to detect methylation.
Our offering provides DNA methylation directly from the sequencing instrument with no additional effort.
Our new methylation and our existing workflows like ICSC are examples of how we're transforming into a multi omics company chill.
<unk> Mercy, Kansas City is expanding its collaboration with US to include these two features in its research study to understand the epigenetic and transcript helmick drivers of rare disease. In addition to exploring associated underlying genomic variants they've already demonstrated.
Demonstrated how their use of hi Fi has uncovered four times more rare coding structural variance than short read sequencing and we expect adding Pac bio methylation capabilities and isoform sequencing will further strengthen the use case for hi Fi.
We look forward to improving our ISO seek offering later this year with a new kit that we believe will dramatically increase throughput and power higher output transcript ohmic research.
We continued to add to our list of clinical research collaborators in the first quarter and now we have over a dozen working collaborations with the goal of demonstrating hi Fi utility across several applications.
We're also pleased to offer our new AAV protocol and analysis solution for AAV vector gene therapy research.
AAV vector gene therapy is an exciting and rapidly growing area with over 150 companies working on AAV based therapies today.
High accuracy and complete visibility are critical to the success of novel vector discovery vector design and manufacturing quality control for gene therapy products.
We believe hifi sequencing can play a critical role in gene therapy related research due to its ability to sequence full length AAV genomes at very high accuracy. This.
This is important because Q PCR short reads and less accurate lottery technology can miss important changes that may be present in the AAV sequence, which could negatively impact our customers' research.
Over the past few quarters, we've delivered eight instruments to new pack bio customers working on AAV and have several more in our sales pipeline.
New feature is yet. Another example of how we are developing end to end solutions tailored to our customers' specific application needs.
Pac bio hifi sequencing has long been a go to technology and plant and animal research due to their complex genomes and the value that highly accurate long reads bring to de Novo Assembly and building reference genomes. However in order to enable broad app adoption of hifi sequencing and commercial.
Sure New resource efficient higher throughput methods are required to that end. We are working with Cortez are accurate science to develop and then workflows for plant.
<unk> and microbial sequencing.
To further their seed development and crop protection research and production pipelines.
We anticipate that these new high throughput agricultural protocols will be made broadly available to the community sometime in 2023.
The length and accuracy of Hi Fi, it's critical to new seed product development as these genomes tend to be more complex and are harder to sequence and assemble.
Moving on.
I'd like to.
So I'd like to take a moment to describe three critical advantages of using native DNA.
Molecular integrity absence of amplification steps and simpler sample preparation and bioinformatics workflow.
First because native DNA molecules that are extracted from cells are directly submit it to the sequencing. The DNA fragment can be much longer compared to synthetic approaches having longer and contiguous sync winces lead to greater contiguity of information and improves the results in de Novo genome assemblies.
As well as better genome communities haplotype, phasing epigenetic phasing and structural variant detection.
Second sequencing data of DNA molecules by definition does not use DNA amplification or other molecular biology procedures, which are prone to biases and can introduce errors fragmentation and other artifacts synthetic long reads require these procedures and risk confounding star.
These with artifacts that can provide potentially inaccurate information sequencing of native unaltered molecules enables our technology to look at Chi announced without these biases, resulting in better coverage uniformity resolving deployed and polyploid genomes into fully phased allele and achieving greater.
Completeness.
<unk> sequencing, therefore, thereby access as the whole genome resolving structural variance in other regions of the genome considered difficult to sequence with short reads due to limitations of the sequencer itself, which can therefore not be overcome with synthetic long read contracts further amplification.
Steps result, and the complete loss of methylation information.
By sequencing native DNA molecules as I described earlier Pac bio provides both genetic and the epigenetic information simultaneously without any additional effort and.
And third the sequencing of long native molecule significantly simplifies all workflow aspects from upfront sample and library preparation to bioinformatics at the backend pack bio native long Hifi reads did not require bioinformatics REIT correction steps complicated REIT assembly steps consensus.
Patients from overstaffed plane or Subtractions from control samples, we have seen time and time again over the past decade. Numerous attempts at synthetic long read approaches which were all eventually abandoned we believe native long rates will continue to provide the most accurate contiguous and complete genomic and epigenome.
<unk> information with ever increasing applications.
Nothing has highlighted the limitations of short read sequencing and whole genome sequencing more than the landmark publication from the <unk> American source from which completed the final 8% of the genome.
That short read sequencing had been unable to do despite years of improvements in informatics and AI.
So then I often get the question why isn't hi, Fi and long read sequencing ubiquitous today, why our genome still being sequenced at all with incomplete and insufficient technology.
Cost throughput and accuracy have historically, given short read technologies D edge and made short read the de facto winter over the past decade with just a few years ago with the launch of Hifi sequencing Pac bio became the leader in sequencing accuracy as evidenced by the data from the precision.
F D E and the association of bio molecular resource facilities are improvements in accuracy of enabled much broader adoption of long read sequencing outside of its historical niche areas. We've now seen increased hi Fi adoption in human applications as we discussed the handful of clinical research collaborations.
In genetic disease, and the growing list of customers conducting research in oncology gene editing and reproductive health.
We expect our next generation long read sequencing is equipped with hi Fi will overcome the remaining two barriers of adoption cost and throughput and marked the inflection point of large scale adoption of whole genome sequencing using high five.
Moving on to short reads, we do remain on track to launch what we believe will be the most accurate short read sequencing. We expect this sequencer will address other high growth areas in the genomics market, where hifi sequencing may not be necessary as part of our strategy. We see this as the best way to address our customers' needs we aim.
Aimed to develop the right instrument and chemistry for the right application and not force fit one sequencing technology to address the entire market.
It is these transformative products in development along with the World class team that we have built that give me confidence in <unk> ability to deliver over the next several years. However, delivering on our mission requires substantial investment and in todays uncertain market and financing environment. We are extremely fortunate tab.
Nearly $1 billion in cash on our balance sheet and as I earlier mentioned, we intend to fund our current development and commercialization programs using cash and investments that we currently have on the balance sheet until we reach positive operating cash flow without the need to access the capital markets.
Finally, I'd like to take a moment to update you on our collaboration with <unk>.
As you May recall, we are partner with N V to create an ultra high throughput sequencer capable of sequencing tens of thousands of whole genomes each year. The development of this new platform is going very well and there continues to be great enthusiasm for the potential of adopting hifi sequencing at scale in a clinical setting.
However, given the difficult capital environment, and VITAS asked us and we are planning to amend our agreement such that <unk> will no longer make payments during the research and development phase of the collaboration and exchange the pricing of the platform and related consumables to <unk> will be increased to be more in line.
With our expected market price the other aspects of the collaboration will continue for example, we expect in detail we will continue to leverage their internal resources to assist in the development of scaled workflows bioinformatics pipelines into other aspects of the project as.
As a result of this amendment, we believe that <unk> will be on a more level playing field with other large scale users of our ultra high throughput system. We expect to compete complete the amendment during the second quarter I want to reiterate that this proposed amendment is the result of the macroeconomic funding environment and does not reflect.
Either company's enthusiasm for the collaboration the development timelines performance to date or other product specifications.
With that I'll hand, the call off to Susan to talk about our financial results in more detail Susan.
Thank you Christian.
We reported $33 2 million in product and service revenue in the first quarter of 2022, which represented an increase of 14% from $29 <unk> million in the first quarter of 2021 and was at the high end of our guidance range.
Instrument revenue in the first quarter was $15 6 million, an increase of 4% from $14 9 million in the first quarter of 2021.
We delivered a record.
Well, two and chewy systems during the first quarter growing the installed base to 424 system as of March 31.
Turning to consumables revenue of $12 7 million in the first quarter grew 22% from $10 4 million in the first quarter of last year and equal to in QE consumables represented approximately 85% of our total consumable revenue in the first quarter with the rest from older systems.
Other consumables.
Annualized pull through per system on an equal to and can we installed base in the first quarter was approximately 115000.
In the first quarter as we discussed on our last earnings call, we saw lower utilization largely due to the impact of COVID-19 slowing lab productivity.
While we saw improvement in some regions towards the end of the quarter. The escalating cases in China and associated Lockdown impacted utilization throughout Q1.
As we've discussed before our record placement is equal to two we may have a short term impact on pull through especially as we onboard new customers.
Finally services and other revenue grew to $4 9 million in the first quarter compared to $3 7 million in the first quarter of 2021, reflecting our growing installed base.
Shifting to a regional view America's revenue of $19 1 million grew 57% compared to the first quarter of 2021 extra week and delivered a record number of systems and consumables and service revenue commensurate with the larger installed base of sequel to MTBE.
Moving to Asia Pacific revenue of $8 4 million reflected a 1% decline over the prior year period with lower insurance revenue, partially offset by growth in consumables.
Consumable growth was somewhat muted in the region with headwinds, resulting from COVID-19 restrictions, particularly in China.
Other parts of APAC saw strength with record consumables in Japan, and our first system placement in Australia. Since Q2 of 2020 countries, where we've been expanding our commercial reach.
Finally, EMEA revenue of $5 7 million was 32% lower compared to the prior year period as the region was most impacted by the surge in coronavirus cases earlier in the quarter.
At our customer site as well as among our own employees in EMEA.
While COVID-19 impacted both instrument and consumable sales the team still made great progress growing our reach with four countries in the region, taking their first equal to our T V.
Including Israel, Serbia, Poland and Austria.
We also delivered the first time buyer instrument E. M. D. L gene core the European Molecular biology lab, who is preparing to launch hifi sequencing services across microbiology human implants in animal application.
Moving down the P&L as a reminder, I will share both GAAP and non-GAAP results for gross margin operating expenses and net loss.
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 $14 2 million in the first quarter of 2022, representing a gross margin of 42, 7%.
Excluding amortization of intangible assets first quarter 2022, non-GAAP gross profit of $14 3 million represented a gross margin of 43, 2% compared to a GAAP or non-GAAP gross profit of 13.0 million or 44, 8% in the first quarter of last year.
The decline was predominantly due to the mix of instruments, reflecting the largest volume of quarterly multi instrument placements.
Well, it's the sequel, one trade in incentive in the quarter and Q1 2022, resulting in a lower instrument average selling prices, partially offset by higher consumable volume.
Moving on GAAP operating expenses were $91 7 million in the first quarter of 2022.
Excluding a credit of $1 1 million related to contingent consideration re measurement, which was due primarily to an increase in the discount rate and expenses related to amortization of intangibles non-GAAP operating expenses were $92 7 million.
This represents a 99% increase from non-GAAP operating expenses of $46 7 million in the first quarter of last year, reflecting growth in head count operating expenses related to the acquisition of omni air and non head count.
Related R&D spend.
In terms of headcount we ended the quarter with 774 employees compared to 728 at the end of 2021.
GAAP and non-GAAP operating expenses in the first quarter included a total noncash stock based compensation of $29 million compared to $9 2 million in the first quarter of last year.
GAAP net loss in the first quarter of 2022 was $81 5 million or <unk> 37 per share.
Excluding the change in fair value of contingent consideration amortization of intangible assets and the repayment of continuation advances to alumina non-GAAP net loss was $82 3 million also representing 37 per share compared to a non-GAAP net loss of $35 4 million or <unk> 18 per.
A share in the first quarter of 2021.
Now turning to our balance sheet.
We ended the first quarter with $963 million in unrestricted cash and investments compared with 1.04 billion at the end of 2021.
Inventory balances increased in the first quarter to $29 6 million, representing 2.8 inventory turn compared with $24 6 million at the end of the fourth quarter of 2021, representing three six inventory turns.
The decline in inventory turns reflects our strategy of increasing safety stock levels to manage global supply chain risks to continue to ensure we have the necessary raw materials to meet our customer demand.
Accounts receivable increased in the first quarter to $27 9 million, reflecting a DSO of 71 days compared with $24 2 million at the end of the fourth quarter of 2021, reflecting a DSO of 62 days with the increase primarily due to more revenue, but later in the quarter.
Long term deferred revenue remained relatively flat compared to the fourth quarter of 2021 at just over $25 million as we did not receive incremental cash burn and decay in the quarter as Christian discussed earlier.
Moving to guidance.
For the full year 2022, we continue to expect revenue in the range of $160 million to $170 million, representing a growth rate of approximately 23% to 30% compared to 2021.
This guidance assumes there are no more significant or prolonged disruptions related to COVID-19, or its varian and it assumes that global supply chain constraints are not worse than.
Specifically, our revenue guidance assumes the slowing utilization, we experienced in Q1 recovery and utilization in China improved by early summer.
As such our guidance assumes that back half of 2022 that is much stronger than the first half.
Specifically for the second quarter, we expect revenue to grow sequentially compared to the $33 2 million reported in the first quarter of 2022 with sequential growth in both Americas, and EMEA, partially offset by a slight decline in APAC due to the record consumables revenue quarter, we experienced.
In Japan for Q1.
Moving down the P&L, we expect the non-GAAP gross margin to be at the lower end of our previously guided range at between 45% and 47%, mainly reflecting increased supply chain costs.
For operating expenses, we expect the full year to now be in the range of $3 55 to three five.
The increase primarily reflects a nonrecurring noncash stock based compensation expense due to lower than expected employee attrition we observed in Q1.
We continue to expect interest and other expense to be approximately $15 million for the full year, reflecting interest expense and amortization of debt issuance costs for our convertible notes issued in 2021.
We expect the weighted average share count for purposes of EPS for the full year to be approximately 225 million shares.
With that I will turn the call back to Christian Christian.
Susan the team executed tremendously in the first quarter I missed one of the most trying macro environments we've ever seen.
With a third of the year behind US we believe that we are on track to meet our revenue target we set forth at the beginning of the year our product our product roadmap is full of exciting and innovative products that we can't wait to share with the genomics world and by our estimate we intend to fully commercialize these exciting new products.
Using the cash and investments that we currently have on the balance sheet and in turn we believe that will drive us to operating cash flow positive in the future.
That I'd like to invite the operator to open the floor to Q&A.
We will now begin the question and answer session to ask a question you're right. Chris Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily for first question.
And our first question today will come from Dan Brennan with Cowen. Please go ahead.
Great. Thanks for thanks for taking the questions and congrats maybe just a couple of tactical one short term and then a bigger picture one just on I know, there's a lot of discussion in China, you guys summed it up there and the concluding comments I'm. Just wondering did you say what China did in Q1, and what specifically it sounds like youre, assuming by the end of the.
Quarter Q2, it's kind of getting back on track kind of what's assumed in Q2 and for the rest of the year for China.
Yeah I think.
I think in Q1, China, probably represented about 15% of the business.
And for.
For the rest of the year, we're hopeful that as.
As it recovers I suspect second quarter might be a little lighter than that given.
Given the lockdowns in the environment right now, but as Susan pointed out.
If things kind of start to moderate in the summer.
That gives us that gives us some good good belief that we're going to achieve the 160 to $1 70 that we've outlined.
Got it no. Thanks Christian just one more tactical one since you brought it up last quarter I didn't hear a mention of it today, but just to get it off the table like emerging Biopharma, you guys decided to noise coming into the year not even quite sure how big that as a percentage of revenues, but just to kind of check the box here was there any involved and what was the trend in that customer base.
It started off in the first quarter.
Yes, I think it was consistent with what we were talking about back in January .
Any any of the smaller emerging companies that are.
Not generating positive cash flows and that are sitting in this macro environment are definitely longer sales cycles right now and then and they were that way throughout the first quarter and quite frankly, I don't expect them to change over the balance of the year, we've considered that when we win.
We're talking about our guidance.
And how we're thinking we're going to build the business. Obviously, we're really excited in areas like AAD, where there are some smaller customers.
In terms of size and balance sheet customers, there that have been rapidly adopting the products because the sequel to we.
Really serves them well across what they're trying to do but some of the emerging.
On a more traditional pharma is.
I still think that that business is going to be tough for us for until.
As they manage their own balance sheets.
I suspect.
That will continue that will start to improve as the world normalizes, but.
Q1 is as I'm sure you understand Dan was a pretty big shock to the system for for all of Us.
Got it and then and then Christian you spent a fair amount of time in the prepared remarks discussing all the advantages that that made them long read sequencing platform has over something that you would need to be some said it well.
I'm just wondering like.
Did you see any.
Pause at all is there any pent up demand for placements.
Such that as we get through <unk>, and we see kind of more details about infinity.
Is there could there be an unlock along with some customers that are on the sidelines I'll just maybe give a little color for kind of what the sales force was seen during the first quarter.
Yeah, you know, obviously I asked that question a lot.
And really been laser focused on it and what we've seen is in.
In general it hasn't really slowed the sales cycles down, perhaps maybe a little bit in Europe more than in the United States and in APAC.
And I.
I do think there's probably potential for a bit of an unlock as you kind of.
As folks start to understand what what other techniques might look like.
But when you really sit and talk to the customers.
They they hired they pair it back to me all the things I just pointed out on the.
In the prepared remarks that.
If we're serious about doing long read sequencing, we need to be using pack bio because you.
Just get the you get more complete information you resolve the biology in a more detailed way and they know that we are continuing to improve as evidenced by the direct methylation.
<unk> launch that we had just a few weeks ago and so they just see that there's there are significant limitations.
But that doesn't mean, they're not learning about this and I think at the end of the day.
Our growth is likely to be unhindered by by Infinity.
Great and then maybe one last one just on the new high throughput platform I think we're expected to get some data or look at it in the back half of this year just could you remind us specifically like what we're going to see when we're going to see it and how should we be thinking about obviously secret TUI is doing well you have a big opportunity ahead of you.
But I think there's potentially building excitement for what the new platform could be do so just maybe an update on what we're going to see and how we think about what the potential opportunity is Bruce.
Number one there's an upgrade opportunity obviously, but like what's the how do we think about the potential new customers that this could draw.
And to the long lead market.
Yeah, Dan that's a good question. Thank you for it.
The one thing that we have seen time and time again as as you can start to offer advances in the technology that are.
Very significant along different axes, whether that's accurate.
Accuracy through could cost.
You get to see major traction in the market and you see a bit of a replacement cycle, you see new customers coming into the market and our intent and it's basically the same strategy that I described to investors.
When I first joined us to build a multi <unk>.
Our multi product portfolio with different instruments at different price points and throughput capabilities that give more and more customers access to the power of long reads and the power of Hifi sequencing. This is part of that part of that journey and we're obviously moving towards the higher end first because.
As we see incredible opportunity and whole genome sequencing in particular.
With higher throughput platforms.
The ability to reach the sub $1000 cost that we've talked about in the past and when you start to think about our development programs are programs are progressing well the teams are working hard.
And as I pointed out.
I guess that J P. M. In 2021. These would these platforms would take a few years to get out and I think we're largely on track and so you know later on this year I suspect we will give more information, but today I don't want to I don't want to let the cat out of the bag so to speak.
Great. Thanks Christian.
And our next question will come from David Westenburg with Piper Sandler. Please go ahead.
Hi, Thank you for taking my question. So my first question is actually a follow up on the high throughput platform, but instead like the collaboration with <unk>.
We then BK I totally appreciate it a lot has to do a lot with with N.
<unk> cash position is what kind of a reading into it.
But and I'm, sorry, if I'm, a hard headed here, but if they're not funding that and you're not changing your guidance except for one I think there was $5 million that was stock based comp.
How is this platform getting funded and there is this maybe 2023 funding event.
Sorry, if I am missing that maybe I'm too hard headed here.
No. It's a it's a great question. This is probably good to take a moment to just clarify so.
If you think about it the way we're doing the accounting for the in VK payments, what they really are prepayments for buying the the actual system and so.
What day, what we've been doing is as they pay us.
<unk>.
We put that into deferred revenue.
And we're still paying we're still.
Recording the R&D expense on our P&L so yeah.
<unk>.
The P&L doesn't change at all we've been investing all along and recording R&D expense will continue to do that.
And then you've got this building deferred revenue and so we are we are working with and VK such that all we're really doing is changing the timing of when they make payments.
To give them got it.
<unk> flexibility on their cash and and that's why it's really important to understand that what's really happening is we increased the pricing of the final product.
That will actually capture more gross margin more more all if you look at the NPV of this particular project. If you look at this project, we actually will make.
More profit and more cash flow.
Under this under this.
Amendment than we otherwise would have made and the other thing that's really beneficial to us is that their pricing will be such that.
Others will be able to compete with them a little bit better I mean, they're still gonna have incredible pricing they are completely committed to the.
So the relationship and Theres still investing their internal resources, but we've just reallocated how they how they pay for the machines by paying at the end of development instead of along the way and so that's that's really the difference and the R&D expense continues to be recorded as.
You know as as it has been.
Got it I appreciate you I had a gap in my coverage of you guys win when that when that was signed so thanks for the reminder, there.
And then and then in terms of pull through I think Susan laid out some of the omni on the crime and in January and then kind of what was happening in China would.
Could you give maybe give us a sense for what you had in pull through and maybe March or April I mean, I'm, just trying to get a sense of.
Is this pull through normalizing as were heading further into the quarter or further into the quarter and then it looks like it's behind you or.
Anything like that.
Well I don't think we're going to give individual months because.
Any individual months could be aberration.
But what we can say is that pull through is improving over over what we reported in Q1 and now.
Pull through as a metric that that's you know.
Dominated by both the numerator and the denominator and so at some level as we sell more instruments per quarter. The pull through will likely go down, particularly when we're selling to so many new customers. You know one of the things that in our executives business reviews. This quarter was uncovered is that.
The time to get a new customer.
To run their first chips, our first smart cells could be as much as 90 days from when it's installed because theyre working on workflows et cetera, et cetera, and then from there it's training and scale up with samples and so as you're seeing us get so many new customers that puts pressure on the.
Short term.
Short term.
Pull through.
And as we sell so many more instruments, obviously that hurts the denominator now.
When we when we sell to a very high throughput or high throughput capable capable customer like the broad institute at such a large scale.
That will likely help.
Pull through but it will be somewhat offset because they have.
They get great pricing because they do so much volume.
When you have that whole that whole mix, but.
At the end of the day.
We think that that pull through will increase from here.
And also China, China, China has been we did okay in APAC, because we sold a lot of instruments.
Pull through or pull through in China was.
Well below our expectation during the quarter and as that recovers that will bring the number up as well so theres a lot of different factors at play, but I do think on balance you're going to see the number improve from here.
And we'll go from there.
Perfect that was a really nice detailed answer there I'm just going to ask really one because I think it's going to be very short the one third of two new.
<unk> was that inclusive or not of that big order.
Institute.
That's inclusive we'd take the hole, we shipped 50 systems. So its one third of those 50 systems.
So closer to that closer to more than half alright. Thank you very much.
Thank you.
And our next question will come from Dana.
With Morgan Stanley . Please go ahead.
Hey, guys good evening.
Go back to that.
The broad order you mentioned Christian.
Hum.
As you as you sort of have framed the guide.
For Q call was that sort of already contemplated or was that all upside which came through.
Late in the quarter and then as you think about your order funnel or your instrument backlog here heading into the back half of the year can.
Can you just give us a sense for the breadth of the demand versus any other sort of like large multiunit orders that we should be thinking about.
Yeah.
Okay, a couple of things so with the with the <unk> Guide.
Some of the broad order was contemplated but not all of it and we were we.
We were hedging a bit in our in our internal thinking because when it's an order that big you never know.
And it's good that the timing of which it was gonna actually.
Ah manifest itself, so some was but not all.
And then if you think about the back half of the year one of the things that's really exciting and one of the things that is driving.
Why we made these commercial investments as the number of named opportunities for new instruments is that one of its largest if not its largest level ever in the history of the company.
What that means is that we have more sales coverage or more.
More coverage of potential instrument sales too.
Meet our forecast and meet and meet our guidance and let's face. It that's because we've hired more sales reps and those sales reps are in fact.
Those sales reps are in fact prospecting and so there's lots of ways to look at Salesforce productivity and I tried to I tried to do.
Highlight that in the prepared remarks, hopefully that was effective but you know.
It's revenue per rep over time.
Sales velocity, how big is the sales funnel and the quality of the leads you are getting.
All three of those things are generally improving or for the company and give us.
Give us a strong pathway to growth for a long time to come and that's what that's what's so powerful I guess the last thing I'd say with respect to the funnel.
When you do a.
And 18 unit sale to the road that now they have 23 instruments in there in their fleet, that's really a lighthouse account and Thats a validation of the technology validation of where the technology is going the applications. They see lots of opportunity in numbers of samples and.
<unk> and that lighthouse.
Chris genome centers that might be competitive with them.
So that's actually.
That's one reason why it's such a powerful wind for us during the quarter.
And the other reason is we really enjoy working with the broad theyre very collaborative and they will help push us as much as anyone else. So that's really great.
Got it Super helpful.
And then I appreciate the color you've shared on China question, but I guess one of the questions. We've been getting is what's sort of like driving your confidence, perhaps conversations with local government authorities or your marquee set of customers in the region. There that makes you assume that things get better by the summer.
It seems like it's a pretty fluid situation.
And the Lockdowns kind of like ebb and flow at least in Shanghai, and Beijing et cetera. So I'm just curious as to how you thought about that when you made that assumption in the guide for summer recovery and normalized utilization in placements there in the back half.
Well I think you know one of the reasons why we.
Made some of these assumptions as we actually hired a really highly qualified country manager in China, now who is phenomenal and in fact.
He was a big reason why we had such a nice quarter on instruments, we had a lot of trade ins from sequel, one is equal to we.
And so we're building a little bit.
Better than the company's ever had Intel on the ground, which helps us kind of understand that but as Susan said in her comments look we don't we none of us know exactly when things will return to normal we probably err on the optimistic side instead of the absolute pessimistic side.
But we also see our business growing throughout APAC and we also see like we talked about.
China had effect I mean that Japan had a fantastic quarter, we finally sold an instrument in Australia.
We're starting to build out some of these other territories that that can help offset some of the chat.
Challenge in China should should China, not recover as we expect.
And then China and as Susan also said look if China doesn't recover it will clearly put pressure on our guidance at some point.
But we have a lot of as I said before our opportunity funnel is very significant and we will work to mitigate that and grow on top of that.
As you guys would expect us to.
Got it and then one final one for me on just traction for that the Hi Fi viral kit.
I think on the last call Christian you had mentioned sort of high single digit millions of Covid contributions.
This year that was last year and this year, you would expect that to skew more towards consumables is that a possibility of a little bit of upside there given how that perhaps did thanks to the omicron Marianne.
Or how are you feeling about that contribution at this stage of the year.
You know I think that.
I think it has potential to contribute but I don't think its going to be.
Significant contribute contribution to make our year or not make our year and one of the reasons for that as you know, particularly in the United States.
Testing is down a bit Eric surveillance has been down a little bit.
Time to implement a new technology some labs.
They love the assay they want they want to be engaged but they're not there's a lot of uncertainty of how much further surveillance lv and funding and so although it's been an incredible learning experience for us and generated some good revenue and been able to get us into public health labs, where.
We had no no chance of getting into before I don't expect it to be.
A major contributor to our revenue for the balance of the year.
I could be wrong.
<unk>.
If we have another surge, but thats kind of where we sit on that.
Got it very helpful. Thanks for the time guys.
Yes.
And our next question or if you would like to ask a question. Please press Star then one and our next question will come from Kyle <unk> with Canaccord. Please go ahead.
Thanks, Hey, guys. Thanks for taking the questions and congrats on the quarter I wanted to start with the kind of.
Sure. So let's talk about products like the Nextgen kind of.
Towards the end of your kind of watching hopefully soon it has been three years or so since the launch of the <unk> chip in the sequel, II and like earlier on the call you were pretty vocal about developing at least in next Gen sequencer pretty soon so that would probably require a higher density smart so.
And I know that like per genome cost and throughput are kind of like the critical factor here, assuming and when you became CEO question. In 2020, you talked about I think increasing throughput by 25 X and reducing costs by like seven folder. So so are those metrics those kind of like thresholds like some kind of reasonable for the smart technology in the near term.
And these like Nextgen kind of Pac bio products could that cause those we launched like this year in 'twenty, two or is that more of a 'twenty three kind of story.
Yeah. So we have not said Kyle exactly when.
When we're going to launch these products in wind development will be finished nor have we given specifics specifications and clearly it's because the sequel TUI is performing extremely well in the market customers are very excited about it but at some point we will.
To advance the technology to the state, where youre talking orders of magnitude and levels of throughput et cetera, I don't want to quote specific numbers today, but it is kind of our mantra right is we have to increase the throughput very significantly so we can able enable.
Scaled science, whether that's in whether that's in clinical applicable research applications or in.
Kind of whole genome surveillance kinds of projects or genomics, England like projects et cetera.
And so it will be important for us to get there and get there soon.
We'll unpack that more of the development programs are going very well.
And we continue to hit our internal milestones and so we're right on track for that.
But at the right time, we will unveil it more.
Wholesome Lee, but we don't we want to make sure that we maximize our opportunity with the sequel to re platform, while we have it that makes sense.
Okay. Yeah that was great. That's fair question I appreciate that.
Just on Omnia on kind of similarly.
This has been touched on before I, just want to revisit it because of the beta launch I think this should be ongoing can you provide any more maybe details on the spec for the omnium platform maybe for the beta units right now.
There has been talk about flexibility obviously in the marketplace look how many folks are as per what are you thinking maybe cost per <unk> for folks so even and I guess overall like how should how should we how should investors really think about some of these metrics as they stand the stand out and kind of stack up versus <unk>.
The merging of the existing onshore rig companies for example cost per gigabyte basis, 5% to 50 gig.
Per gig nowadays and so I'm just curious to hear like any more clarity there given the market is obviously, becoming more crowded.
Yeah. So it's a good question Kyle I'm sure, we'll talk about it more in <unk> so hopefully.
If you are there.
Spend will spend a lot of time on it I'm sure, but in a nutshell, we see the platform as being highly competitive with any of the emerging flat players.
It'll be a mid throughput system as we've talked about it will have.
Accuracy Q40.
Accuracy, 90% of the reads will be Q40 is our expectation right now and.
In terms of cost per G. It will be competitive with the emerging players in the existing players, but one of the things that we're going to our accuracy is so much higher than the competition that we really wanted to change the narrative because we want them, we want to talk about the price per answer because if you can even if you are selling it.
Five to $7 of Gee, let's just use that hypothetical it that you said.
You know what really matters is how many <unk> do you need to get that answer.
And that's really the that's really where I think we're going to shine are more than the other emerging players I mean on the straight cost for GE, it'll be competitive absolutely, but but and we will still be able to generate more gross margins that will make sense for us.
But.
But it's really about the offering to the customer how many how many genes of sequencing or how many samples can I put in a flow cell to get the answers I want because that's what really drives the economics and the accuracy drives the level of.
<unk> coverage.
And less coverage, obviously means less sequencing less sequencing. The last cost also means more speed, which gives us a lot of competitive advantages that I think will make the platform very compelling.
Okay sounds great I'll look forward to hearing more at HPT and then maybe just finally I wanted to touch on some of the new workflows that kind of transform the sequel to into like a five basic with or.
Without all that kind of additional cost and time and effort.
I guess I'll, just kind of wondering what what the five based functionality does pretty clinical efforts and I know that children's mercy values type of genetic modifications for pediatric rare disease. I think that you were alluding to that earlier, but ultimately do you think that the direct metal calling could improve diagnostic yield of one re sequencing for different diseases.
Absolutely.
No we'll stick with the children's Mercy example for a minute I mean, they they were one of the early early access users and even the first runs that they're getting they're seeing you know allele specific or half the type specific epigenetic profiles that give them.
Indication includes into disease, and so I think that you know at a fundamental level changing the narrative of what a complete genome is what a clinical grade genome is the utility from the genome is all of these different tools, whether they're structural variant analysis, whether it's methylation.
<unk>.
Whether epigenetic status, whether it's the ability to call.
The call the appetite without having to do any extra work and starting to see all of this genetic picture in one assay with one informatic workflow really changes the game in Sim and helps us resolve the biology and at the end of the day, that's going to be one of the core value propositions.
So long long read sequencing in general versus short read and as we get throughput and cost down.
It would be surprising to see to not see very significant transition, particularly in clinical applications. When you want it you just want to see more of the genome to understand what's going on.
Okay. That's great. Thanks, a lot I appreciate it congrats again.
Thanks, Kyle it's good to talk to you.
And this will conclude our question and answer session I'd like to turn the conference back over to Christian for any closing remarks.
Great. Thank you. Thanks, thanks to everyone for the questions.
After two years of limited travel were finally excited to get back on the road and interact with our customers and investors right now we're in the midst of our discoveries roadshow, where were traveling to 20 cities around the world to put hifi sequencing on display.
Get you to look at our schedule on our events webpage and join US for one of our meetings if you're available.
Also excited to see what Hebt next month, we will be having an investor meet and greet and panel Q&A with our leadership team to kick the event off so we hope you can make it. Thank you and we look forward to continuing.
To update you on our progress throughout the year.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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