Pacific Biosciences of California Q2 2023 & Acquisition Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 11 speakers on the call.

Operator

And welcome to the PacBio Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this conference is being recorded. I would now like to turn the call over to Todd Friedman, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, MJ. Good afternoon, and welcome to PacBio's Q2 2023 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or is furnished on Form 8 ks available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer and Susan Kim, Chief Financial Officer. Before we begin, I would like to remind you that on today's call, we will be making forward looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance and others including expectations regarding our financial guidance and operating plans, our Revio and Onzo systems and their commercialization plans, The future ability availability, uses, accuracy, coverage, advantages, quality or performance of or benefits or expected benefits of using TacBio products or technologies including our Revio and Onco systems, expectations with respect to our acquisition of the Aptown Biosciences and its products and technologies and expectations with respect to customer demand of our products and technologies and growth in our business.

Speaker 1

You should not place undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially from those projected or discussed, including those inherent in developing and commercializing new products. We refer you to the documents that we have filed with the SEC, including our most recent Forms 10 Q and 10 ks and our recent press releases to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward looking statements except as required by law. During the call, we will also present certain financial information on a non GAAP basis, non GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U. S.

Speaker 1

GAAP. Management believes that non GAAP financial measures combined with U. S. GAAP Financial Measures provides useful information to compare our performance relative to forecast and strategic plans and benchmark our performance externally against competitors. Reconciliations between historical U.

Speaker 1

S. GAAP and non GAAP results are presented in tables within our earnings release. For For future periods, we are unable to reconcile the non GAAP gross margin and non GAAP operating expenses without unreasonable effort due to the uncertainty regarding among other matters, certain acquisition related items that may arise during the year, including amortization of developed technology. We will also discuss our recently announced acquisition of Aptown Biosystems. For more information, we have posted a presentation which can be found on our Investors section of our website at www.pacb.com.

Speaker 1

Please note that today's call is being recorded and will be available for audio replay on the Investors section of our website 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. Finally, we will be hosting a question and answer session after our prepared remarks. We ask that analysts please limit themselves to one question so that we could accommodate everybody in the queue. I will now turn the call over to Christian.

Speaker 2

Thank you, everyone, for joining our call. In today's prepared remarks, I'll update you on several aspects of our business. 1st, I'll discuss PacBio's record performance in the Q2 and highlight our commercial activities. 2nd, I'll comment on Revio field performance of Apton Biosystems, which was announced earlier today. And then Susan will take us through the financials and guidance in more detail.

Speaker 2

And finally at the close with half the year behind us, I'll share how we are executing against our 2023 priorities I set forth at the beginning of the year. Starting with Q2 performance, the rapid adoption of Revio drove another record quarter for PacBio As we grew revenue by 34% compared to the Q2 of last year and we exceeded $40,000,000 in quarterly revenue for the first time in our history, With each region posting record revenue. The team did an excellent job of scaling manufacturing and ramping installations, Which enabled us to ship 45 Revios for revenue and brought our installed base to 77 Revio systems as of June 30. Additionally, we exited the quarter with a healthy backlog of Revio instruments. Revio's momentum and our ability to meet customer demand Have further increased our confidence to raise our revenue expectations for 2023.

Speaker 2

We now expect Full year revenue to be between $185,000,000 $190,000,000 representing 44 to 48% growth over 2022. A diverse set of customers have demonstrated their commitment to Revio And we have now received orders from approximately 100 different customers to date, including several multi system orders, Revio Ansell bundles and steady interest from new customers. In fact, about 45 percent of instruments ordered in the 2nd quarter came from new to PacBio customers. These included a university in the Southeast United States that had previously used an alternative long read technology due to the throughput constraints on the SQL2E platform, Requiring scale, reproducibility and accuracy, the customer decided to re examine the sequencing landscape and decided to invest in Revio. They now aim to leverage HiFi on several research projects with an emphasis on structural variation and its link to human disease.

Speaker 2

Customers in the quarter also included the Medical University of Innsbruck, which marks the 1st Revio in Austria. The customer plans to consolidate multi approach workflows used to analyze difficult genes, which included short read sequencing, Sanger sequencing and TCR and streamline it into targeted long read panels utilizing Hi Fi sequencing. New customer orders in the quarter also included a first instrument order in Indonesia from the YFDS Foundation. The group collaborates with academic institutions and hospitals across the country to promote genomic research and improve health. They ordered the Revye Aonso bundle to match the best suited sequencing approach with the appropriate sequencing application.

Speaker 2

We plan to use long reads in human whole genome sequencing to build a genomic repository across the diverse Indonesian population, to leverage the accuracy of sequencing by binding on Onso to develop targeted panels for liquid biopsy. Revio's increased throughput, accuracy and direct methylation detection continue to expand the long range sequencing into population genomics Programs. In the Q2, Sample, a leading genomic service provider and biorepository based in New Jersey Received its first Revio and expects to start sequencing a cohort of samples for a large scale population genetics program funded by the Department of Veteran Affairs. And in the Q2, the All of Us program released data from over 1,000 PacBio genomes. This is an important milestone as more long read data entering the public research realm can unlock discoveries, Prompting more research and interest in long read genomes, exactly the type of flywheel effect we've been talking about that can accelerate Hi Fi adoption.

Speaker 2

Customer utilization and Revio field performance in the 2nd quarter indicate a Strong start to the product launch. Customers are ramping up their Revio usage with approximately 6,000,000 of our total 13 point 7,000,000 in consumables revenue attributable to Revio during the quarter. This strength Is from higher anticipated utilization from early customers and some customers building a working inventory of consumables in anticipation of larger projects to come. It was also encouraging to see customers place larger standing consumables orders during the quarter. This demonstrates that customers also anticipate a continual flow of samples to keep their Revio busy for quarters to come.

Speaker 2

As a reminder, our utilization and ordering trends, though positive, are early and represent the 1st wave of Revio customers. I expect that we will better understand normalized RevVO pull through sometime next year. Regarding field performance, on average, Customers that are sequencing libraries 15 kilobytes and up continue to hit our specification of approximately 90 gigabases per smart cell. The heart failure rate continues to improve and is well below our launch targets. Later this year, we anticipate launching system updates That will add more functionality and further improve performance.

Speaker 2

Overall, Revio is proving to be reliable in the field. As customers ramp up their sequencing on Revio, it's exciting to see the 1st wave of scientific publications that this new instrument has powered. In one preprint, researchers from Washington University and the University of Maryland began sequencing on Revio and noted that Highly accurate long read WGS on the PacBioRevio system is consistent and can generate 30x genome coverage in 1 smart cell end quote. They also found consistency across smart cells and coverage, detection of variation, methylation and de novo assemblies. In another preprint, researchers from the International Weed Consortium, a group of 24 institutions Reported that sequencing of 80 plant species with Revio and they describe how this enabling pan genomic analysis With the goals of developing sustainable and effective weed control methods and to provide insights about the environmental threats that can greatly reduce crop yields.

Speaker 2

As a third example, a benchmark study by the All of Us Consortium demonstrated that sequencing data, assemblies and variant calling from Revio were essentially identical to SQL-two Hi Fi datasets, but required only one Revio smart cell instead of 3 SQL2 smart cells. Additionally, this study compared the latest PacBio, HiFi and Nanopore methods. Consistent with previous reports, They observed that Nanoport data resulted in a much higher error rate in Intel calling than Hi Fi data And that certain variant classes had lower precision with Duplex Nanopore data compared to standard Nanopore data. Customers are pleased not only with Revio and its game changing throughput and economics, but also with the quality of service that PacBio provides. With that, I am pleased that our annual customer survey was completed in the quarter, resulting in a final Net Promoter Score of 62.

Speaker 2

This demonstrates our commitment to delighting our customers and we look forward to continuing to offer best in class support to all of our customers around the globe. Switching gears from long read to short read, I'm excited to announce that earlier today we shipped our first commercial Onso system. The sequencing by binding or SPV chemistry which is at the core of the Onso system was the early stage technology we acquired from Omnium less than 2 years ago with the promise of delivering customers an extraordinary level of sequencing accuracy. I congratulate the entire team at BackBio for developing this technology into a highly differentiated platform Designed to offer customers sequencing accuracy of 90% of basis at Q40 plus levels or one error in every 10,000 basis, a specification that we believe no other sequencer currently advertises. This is truly monumental a truly monumental moment for PacBio as it's our 2nd sequencer launched in less than 6 months.

Speaker 2

We believe it positions PacBio as the only sequencing company to offer systems specifically designed for both long and short read sequencing And marks the next step in our strategic journey to becoming a multi platform, multi omic company that aims to deliver solutions Across the genomics ecosystem. 1 of the first Onso systems is going to the Translational Genomics Research Institute or TGen, an early collaborator who found that SVB demonstrated the ability to accurately detect ultra low variance without the need for high complexity error correction in a broad range of applications, including infectious disease and liquid biopsy. Now that we are shipping commercially, we plan to scale manufacturing throughout the second half of twenty twenty three. Additionally, PacBio expects to complete the installation of this Onso instrument and ship related consumables later this month. The milestone payment associated with PacBio's acquisition of Omnium will be triggered once both the Onso instrument and related consumables have been shipped.

Speaker 2

Onso is expected to address a significant portion of the short read sequencing market, particularly where researchers are looking to find and understand very rare variants. As these discoveries are made, we believe that these researchers will then want to scale their experiments, As a result of our strategy, I'm pleased to share that earlier today, we announced that we entered into an agreement to acquire Apton Biosystems, A Bay Area based company developing a high throughput short read sequencer using state of the art clustering chemistry, optics and image processing. In working with Apton for the past few months, we found that Apton sequencing platform is capable of generating SVB quality data in a high throughput sequencing system. As a combined company, we expect to integrate and further optimize the extraordinary accuracy of SVB chemistry with Aptons advanced optics and imaging technologies to develop a differentiated high throughput sequencer. When launched, we expect this platform to deliver billions of reads per flow cell, Sequencing output on par with other high throughput offerings, while providing differentiated accuracy and compelling economics.

Speaker 2

Increasing density and throughput is one of the key development challenges in launching a high throughput sequencer and Aptons will give us a significant head start in that development. We are bringing over several talented engineers and scientists from Aptons' lean organization And I've already started planning the development of this next generation sequencer. Of course, many of you may be wondering how this acquisition will impact our Operating expenses going forward. Developing a high throughput short read sequencer has always been on our product roadmap And the acquisition will accelerate our development of a high throughput sequencer and is likely to reduce our overall R and D expenses required to develop the system. Therefore, we remain committed to delivering on our long range targets, while keeping OpEx Under 5% compound annual growth through 2026.

Speaker 2

And this acquisition is not expected to deviate PacBio from that target. In fact, Susan will discuss shortly that we expect operating expenses to be lower than previously anticipated in 2023. And with that, I'll pass the call over to Susan to discuss our financials. Susan?

Speaker 3

Thank you, Christian. As discussed, we reported $47,600,000 in product, service and other revenue in the Q2 of 2023, which represented an increase of 34.1 percent from $35,500,000 in the Q2 of 2022. Internet revenue in the 2nd quarter was $29,900,000 an increase of 91.6 percent from $15,600,000 in the Q2 of 2022. The continued momentum of Revenio primarily drove the increase in revenue as we shipped 45 Revio systems for revenue in the quarter. We ended the quarter with an installed base of 77 Revio systems.

Speaker 3

Higher ASPs in the quarter were in part due to the lower customer loyalty discount extended to customers in addition to more new customers who ordered their first revenue in Q2 relative to Q1. Turning to consumables, revenue of 13 point $7,000,000 in the 2nd quarter declined 5.7 percent from $14,600,000 in the Q2 of last year, with Approximately 44 percent of consumable revenue coming from Revio systems and the remainder from other systems and other consumables. We expect SQL 2 and 2E as a percent of total consumables to decline throughout 2023 as we continue shipping Revio and customers transition to the new platform. Finally, service and other revenue with $3,900,000 in the Q2 compared to $5,300,000 in the Q2 of 2022. From a regional perspective, as Christian mentioned earlier, all regions posted record revenue in the 2nd quarter.

Speaker 3

America's revenue of $24,000,000 grew 10% compared to the Q2 of 2022. Increased instrument placements with higher ASPs more than offset a year over year decline in consumables and services related Transitioning to the new platform. Instruments include continued adoption from children's hospitals as Sick Kids became the 1st customer to receive a Revio in Canada and plan to utilize Hi Fi Long Reads for a cystic fibrosis variant calling project. For Asia Pacific, revenue of $12,900,000 grew 61% over the prior year with both instrument and consumable revenue growth. We are pleased to see such strong performance from all regions in addition to China achieving record revenue in the quarter.

Speaker 3

Additionally, we're excited to have onboarded a new distributor, DK SH, who will provide improved sales, marketing and after sales support in Southeast Asia as well as best in class supply chain and warehousing. We're seeing progress with the new distributor as they have already booked an order for a revenue Onso bundle in the quarter. And other customers in APAC are showing of initial interest in the Onso platform with over 50% of our Onso orders coming from the region. Finally, EMEA revenue of $10,700,000 grew 87% over the prior year period, driven by interim growth, which included customers like the University of Oslo, who's been a PacBio user for over a decade and with Revio, they intend to scale their services to scientists in researchers across the country. Moving down the P and L, a GAAP gross profit of $15,500,000 in the Q2 of 2023 represented a gross margin of 33% compared to a GAAP gross profit of $16,200,000 in the quarter of 2022, which represented a gross margin of 46%.

Speaker 3

2nd quarter 2023 non GAAP gross profit of $15,700,000 represented a non GAAP gross margin of 33% compared to a non GAAP gross profit of 16,400,000 or 46% in the Q2 of last year. Gross margin declined year over year due in part to instrument mix as Revio instruments sold during the quarter had a lower margin, primarily due to loyalty discounts provided and higher initial manufacturing costs. Non GAAP gross margin in the 2nd quarter improved sequentially from the Q1, largely due to higher average selling prices from lower average customer loyalty discounts in addition to more new customers who purchased their first Revio system. While we expect gross margin to expand during the remainder of the year, Gross margin could fluctuate depending on the pace at which SQL2, 2E demand declines, Revio ASP improves and unit manufacturing and material costs decline. GAAP operating expenses were $88,700,000 in the Q2 of 2023 compared to $84,200,000 in the Q2 of 2022.

Speaker 3

Non GAAP operating expenses were 86 700,000 in the Q2 of 2023, representing a 3% decrease from non GAAP operating expenses of $89,600,000 in the Q2 of 2022. The increase in GAAP operating expenses primarily reflects an increase and the fair value of the contingent consideration liability during the Q2 of 2023 of $2,000,000 related to the milestone payment to Omnione shareholders compared to a decrease of $5,400,000 in fair value of contingent consideration in the Q2 of 2022. Non GAAP operating expenses declined year over year, primarily driven by lower R and D expenses resulting from the transition of Revio from development to commercialization, partially offset by increased sales and marketing expenses, primarily related to increased investment in the commercial organization. Regarding headcount, we ended the quarter with 818 employees compared to 793 at the end of Q1 2023 and 782 at the end of the Q2 of 2022. Operating expenses in the Q2 included non cash share based compensation of $16,700,000 compared to $18,000,000 in the Q2 of last year.

Speaker 3

GAAP net loss in the Q2 GAAP net loss is $71,400,000 in the Q2 of 2022 or net loss of $0.32 per share. Non GAAP net loss was $65,600,000 representing $0.26 per share in the Q2 of 2023, compared to a non GAAP net loss of $76,600,000 representing $0.34 per share in the Q2 of 2022. Turning to our balance sheet items, we ended the 2nd quarter with $829,900,000 in unrestricted cash and investments compared with $874,900,000 at the end of the Q1 of 2023. The change in cash primarily reflects our operating loss with interest income offsetting expenses associated with our convertible note exchange. Inventory balances increased in the 2nd quarter to $67,600,000 representing 2.0 inventory turns compared with 50 $2,000,000 at the end of the Q1 of 2023, representing 2.1 inventory turns.

Speaker 3

The increase in inventory primarily reflects purchases A regular Onslow instrument and consumables inventory. Accounts receivable decreased in the Q2 to $24,000,000 compared with $29,600,000 at the end of the Q1 of 2023, resulting in our DSO of 51 days declining in the Q2 compared to a DSO of 56 days in the Q1 of 2023. Turning to guidance. As discussed earlier, given the continued momentum in revenue, we are increasing our guidance for 2023. We now expect revenue to be 185,000,000 to 190,000,000 representing a growth rate of approximately 44% to 48% compared to 2022.

Speaker 3

This represents an increase of 10,000,000 at the midpoint. Our guidance assumes modest sequential growth in Revio system placements in the 3rd and 4th quarters. Moving down the P and L, we expect 2023 non GAAP gross margin, which will exclude the amortization of intangible assets to be in the range of 32% to 34%. We expect margin expansion beyond 23% as revenue placements will help drive A mix shift toward higher margin consumables and higher volume and manufacturing efficiencies driving lower unit costs. We now expect non GAAP operating expenses to grow less than previously expected at 3% to 4% growth compared to 2022.

Speaker 3

As mentioned earlier today, PacBio acquired Apton for upfront consideration of approximately $85,000,000 in an all stock transaction consisting of approximately 6,300,000 shares of PacBio common stock plus an additional 25,000,000 in stock or cash at PacBio's option payable in connection with the achievement of $50,000,000 in cumulative revenue related to the commercialization of a high throughput sequencer based on Aptons technology for an overall transaction valued up to approximately 110,000,000. We expect the go forward development expenses related to the acquisition to be absorbed within the non GAAP operating expense growth guidance of 3% to 4% compared to 2022. Additionally, we expect interest income to more than offset interest expense for the remainder of the year. PacBio expects to complete the installation of the first Onso instrument and ship related consumables later this month. The milestone payment associated with PacBio's acquisition of Omnium will be triggered once both the Onso instruments and related consumables have been shipped.

Speaker 3

As a reminder, this commercial milestone represents $200,000,000 with approximately half being paid in cash and half in equity. We expect the weighted average share count for EPS for the full year to be largely unchanged at approximately 255,000,000 I'll hand it back to Christian for some final remarks. Christian?

Speaker 2

Thank you, Susan. With half the year now behind us, I wanted to provide a status update on our Five strategic priorities for 2023. Our first goal was to drive rapid adoption of Revio by converting existing SQL2 and 2E customers and attracting new customers. In the first half of this year, 40% of our system orders were to new PacBio instrument customers. And looking at the pipeline in the second half, we continue to expect about 40% to be new customers, which exceeds our expectations.

Speaker 2

Further, as shown by our ramp in Revio consumables and decline in SQL2 consumables, customers are eager to begin sequencing on the new platform. Our second goal was to demonstrate Onso's extraordinary level of accuracy in the field and show how it can transform research in needle in a haystack applications. As discussed earlier, we've heard excellent feedback from our early collaborators and beta sites about the quality of data they get from Onso and how that can translate into improved research. With 1 beta customer telling us he's had several runs with raw quality scores above Q50, a level it is not seen using alternative sequencing technologies. With the beta program complete and commercial shipments underway, we look forward to getting Q40 plus accuracy into more customers' labs And continuing to hear customer success stories.

Speaker 2

While commercializing revenue in Onso was a top priority this year, It was just as important that we drive our development efforts toward the next generation of long and short read sequencers. We continue to make progress on future long reads, Shifting R and D resources from Ravneo onto the development of our bench top long read and our ultra high throughput long read systems. Further, Aptown now gives us significant head start in developing the high throughput version of Onso, Which will allow us to address one of the largest parts of the sequencing market. And as I've been communicating, I expect Pac BIO to deliver new and differentiated instruments at a much faster cadence than the organization that previously delivered. Next was expanding partnerships across the ecosystem and workflow to drive SPB and HiFi customer adoption.

Speaker 2

Earlier this year, we launched the PacBio compatible program and signed on nearly 20 partners across extraction and library prep automation, sample prep and secondary and tertiary analysis. We expect to sign several more partners this year and we've already seen several examples where these collaborations have led to increased PacBio sequencing. Last but certainly not least is our drive toward our goal of being cash flow positive during 2026. On top of executing on our product launches, the PacBio team has done an excellent job on improving our financial position. We achieved record revenues in the 2nd quarter with an expectation of $0.46 growth This year at the midpoint of our updated guidance.

Speaker 2

As discussed, we also expect operating expense growth for the year to be 3% to 4% over 2022 levels, which is below our 5% compound annual growth target through 2026. Additionally, we further strengthened our financial position in the Q2 by exchanging a significant portion of our notes Due in 2028 and extending the duration of our debt, while lowering our coupon payment. As you can see, it's been an Citing and rewarding first half of the year for us at PacBio and we look forward to sharing more as the year progresses. And with that, I'd like to open up the call to questions. Operator?

Operator

Thank you very much. We will now begin the question and answer session. As mentioned in the interest of time, please limit yourself to one question only. Today's first question comes from Matt Sykes with Goldman Sachs. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. Congrats on the quarter. Maybe I just want to start out with sort of a high level question on the Aptone acquisition. Christian, you talked about being able to leverage the scale up of Onso customers eventually into high throughput.

Speaker 4

I'm also wondering, does this open up an additional market for you within short read that Onso cannot to address and that you think has the growth and the size that would warrant the investment that you're making in terms of R and D and development?

Speaker 2

Yes. Matt, thank you for the question and thank you for the congrats on the quarter. This certainly opens up more of the market to us and That's why if you go back and look at our core strategy from the get go, it's been how do we develop Multi product, multi omic portfolio, so that we can reach customers at different levels of demand And optimize our solutions for the problems that each kind of customer is solving. Onso does a Great job of reaching the mid throughput part of the market, particularly given how strong the accuracy is. In effect, For fewer reads, you can actually get more work done because the accuracy is so high.

Speaker 2

We're going to deploy that Same kind of chemistry, the ASPB chemistry on the Apton platform and that will let us get to the very high end of And we believe that once we develop this system, we'll be capable of delivering a product that delivers Billions of reads per flow cell per run with very competitive economics with anything else out there. And so You're exactly right. That's part of the strategy is that Apton will enable us to reach part of the market that perhaps Onso couldn't get to And really round out our offering in the short read space.

Operator

The next question comes from Kyle Nixon with Canaccord. Please go ahead.

Speaker 5

Congrats on the quarter and the acquisition and congrats to John Hanover there at Alton. I saw you guys. So I guess just Two part questions. The first on the guidance, would you mind just talking about, Christian and Susan, what you're sort of baking in terms of the macro environment in the second half of the year? It is kind of evolving.

Speaker 5

It's quite But you guys seem to be a little bit more optimistic. And then secondly, on Apton, I mean, I guess just what does PacBio kind of bring to the table to enable Apton Go from like this kind of stuff mode situation to kind of competing with these leading and emerging companies in high Observatory like Illumina and Ultima? Thanks.

Speaker 2

Sure. Kyle, thank you very much for the questions. Starting with the guidance, We are looking at our forecast and we are evaluating our performance year to date. And what we're really seeing in the market is that Revio is really Revenues has a lot of momentum. We have a very strong backlog position.

Speaker 2

And so just starting from that position of strength, I think helps us in the economic backdrop. One thing that was surprising to me is how fast Our Revio customers are starting to utilize their systems and driving the consumable revenue. And so that encourages us as we kind of look into the back half of the year. Now the world around us, Revio is certainly It's nice to have a new very powerful product in the early part of its product cycle in maybe what could be conceived as a pretty tough macro environment, particularly in say in China, for example. But the truth is we've seen Very strong demand and we continue to see strong demand.

Speaker 2

If you look at China specifically, of course, we have a small customer base. And I don't think we're as impacted yet by any of those macro backlog, looked at the order forecast, looked at the fact that we're gaining so many new customers with Revio And that new customer acquisition really is what's going to help propel the growth not only in 'twenty three, but 'twenty four and beyond. And so That's kind of how we thought about it. If you look at if we move on to Apton, PacBio brings So many things to Apton. We bring scale, we bring commercial channel, we bring deep experience on how to execute and build create products.

Speaker 2

In fact, we demonstrated that, right? I mean, in less than 2 years from the Omnium acquisition, we've got the product to market And it's a dynamite product. We're really excited about it. Revio, of course, we've talked a lot about Revio over the last 6 months. And here's a company, we're able to deliver both products within quarters of each other to the market.

Speaker 2

And so I think the Apton team kind of saw that. What really is exciting is the fact that the Apton instrument And that capability exists already. And in fact, in our diligence, we have demonstrated that chemistry works right on the platform out of the gate. And so what's so great about that is it accelerates our product development dramatically Because we can start on day 1 with a working instrument that we can now optimize the chemistry for and we can optimize the instrument to make It's consistent with our industrial design, our expertise, our manufacturing capability. And so we can Very significantly speed up the development.

Speaker 2

So, I think that I think we bring a lot to the table. I do. I've built a great relationship with John and he's coming across as well as part of the acquisition. So, We're just really excited today. And given the fact that the Onso product Just getting out the door, we do have resources to be able to take this product on without absorbing a lot more P and L, which I think is exciting.

Operator

The next question comes from Jack Neehan with Nephron Research. Please go ahead.

Speaker 6

Thank you. Good afternoon. First is on consumables. Is it possible to share Sort of a range of smart cell utilization you're seeing for Revio in the field. I understand the consumables can be lumpy, but thought the data generation Could be a good early proxy for that.

Speaker 6

And then second, just maybe more broadly, Christian, is it possible to call out Like where you think you might be gaining share with Revio versus areas that were legacy short read? How is that compared to your expectations a few months ago?

Speaker 2

Sure. Thanks, Jack, for the questions. With respect to consumables, we're not going to break Those things out right now. As you can imagine, we're still really early in our launch. What I can tell you is That the utilization metrics have been at what we expected or even a little bit above what we projects and their goal for it.

Speaker 2

As I said in my prepared remarks, we've been seeing more and more standing orders come in. This is huge for us because as we scale as a company, it allows us to optimize our manufacturing so that we know when we're going to need to be shipping consumables And we know those projects are out there. And so I know the whole world wants to know, is the consumable through pull through, What is that number going to look like and how fast are we going to get to kind of our steady state? And I would say we're on that we're certainly on the upward slope of that curve right now, But we're not really prepared to make remarks on where that curve is going to end up other than to say that we're off to a good Probably a little bit better than what we expected. With respect to Revio gaining on the short read space or market share in general, The one thing will and I'll just re point to our in our prepared remarks, we did have one significant win in the quarter That I highlighted where there was another laundry technology entrenched in the account and they are converting Basically, the vast majority of their business to Revio because they see the utility of the product versus other approaches.

Speaker 2

With respect to short reads, I think what we're seeing is that in population scale programs, in particular, you're seeing I'll start to take share in the sense of a project that was once going to be completely a short read project Is now the scientific design, experimental design has been thinking through how do we integrate long reads into that and taking a portion Of those and we've seen several examples of those already just in the first little bit here of the Revio story And we're seeing in our funnels actually major opportunities to take tens of thousands of samples In these kinds of programs and we'll see how that goes over the course of the year. But I think what you're seeing is that The comprehensiveness of HiFi coupled with the performance of Revio and that simplicity and the ease of use And the informatics burden is really putting us in a position to make significant gains here and that's really That's been the strategy all along and here we are starting to really execute on it. Hopefully that helps.

Operator

The next question comes from Dan Brennan with TD Cowen. Please go ahead.

Speaker 4

Great. Thanks for the questions. Congrats on the quarter. Maybe just a multi parter. Just Christian, you talked several times throughout about the very strong backlog.

Speaker 4

Sounds like book to bill could have been notably above 1. So first question would be any color there? Secondly, I know Susan talked about Revio placements up modestly quarter to quarter. Just wondering any color on what drives the pacing? Is it manufacturing capacity?

Speaker 4

Is it customer readiness? Is it the size of your funnel? And could you accelerate it further? And then the final one would just be on implied in the revenue outlook. While you're not going to give a pull through number, could you just help us think there in the mix between instruments and consumables?

Speaker 2

Sure. Thanks, Dan, for the questions. So one thing, we are talking about orders and I've been making a point of this Since JPMorgan actually that we're not going to talk about orders. We did have orders come in on our expectations for the quarter. We are in a healthy backlog situation as we talked about.

Speaker 2

Now backlog is both it's a blessing of course because It gives us some predictability on our revenue, but also every instrument that sits in backlog does not generate consumable revenue and does not propel us forward in terms of long term growth. And so our strategy is to try to whittle that backlog down over time, Which you'll see us start to do. And we've got manufacturing now basically to a steady state Where we can deliver on what we expect to deliver for the remainder of the year and we'll see at the end of the year or basically as we go forth When we need to increase capacity, if we need to increase capacity, etcetera. The revenue pacing itself, Susan did A modest increase sequentially kind of moving forward. I think we're just taking a very straightforward approach to kind of Continuing to build the business, continuing to serve our customers well, we've been doing some hiring with the field Support teams to make sure that we can address issues in the field.

Speaker 2

And so when you look at how we push this business forward, We really are trying to think in totality of how do we create amazing customer experiences so that customers get great data, which create the flywheel for more leads for instruments for more pull through down the road. And so when we think about how we deliver for the rest of the year, we try to think through those things. As far as manufacturing goes specifically, I do think we have capability right now To do pretty well over the course of the year and we always can increase capacity down the road if we need to. Finally, with respect to product mix, The product mix is going to be really important in 'twenty four. 'twenty three as we've been saying all along It's going to be a very instrument heavy year and we'll start to see customers ramping their Revios.

Speaker 2

We still have some questions about How fast SQL2 ramps down and Revio ramps up? So that's an area where we're watching and we're trying to understand. 2 though, we saw the Revio is growing quite a bit and the SQL-two starting to ramp down. So basically in line with our expectations, maybe Revio is a little bit higher than we expected in the quarter. And I suspect we'll probably see some of those trends continue through the rest of the year.

Speaker 2

So it's a very instrument heavy year, going to continue to be, But Revio consumables are starting to really shine.

Operator

The next question comes from Sung Ji Nam with Scotiabank. Please go ahead.

Speaker 7

Hi, thanks for taking the question and congrats on the quarter and the acquisition. Just on the sequencing coverage for Revio, I don't know if it's too early to tell or I realize it also depends on the application, but I was wondering if you might be seeing more of your customers, especially maybe for the population scale projects, taking advantage of lower coverage, given that, that could provide more attractive economics, just kind of curious what trends you might be seeing there? Thank you.

Speaker 2

Thank you, Sanjay. That's actually a great question and I appreciate it. With traditional short read sequencing, 30x coverage is kind of the benchmark. The truth is that customers always are making Their own coverage decisions based on the application. But if you compare 30x short read sequencing with PacBio sequencing, I do think more and more every single week, customers are seeing that less than 15x coverage can get To very significant performance relative to 30x coverage and as a result, you're right, the economics get even better.

Speaker 2

If we just use 15x And you use $9.95 list price, which is what our list price is for a genome on Revio. At LISC, it's basically a $500 genome. So, the economic gap between long and short reads is really shrinking quickly when you look at it on coverage metrics and thinking When you look at it on coverage metrics and thinking about your experiment and there's no question that the Population scale customers are thinking through that and leveraging that ability to get great low coverage and very high accuracy comparable with 30x. Now in other applications, customers are still going to want to do 30x or perhaps Even more perhaps in some oncology, some rare disease, where you're looking where you're trying to make a decision about A patient or trying to understand a translational research situation. And so in those cases, I suspect they might be doing different coverage models Other than that, but it was important for us to start really helping the world understand that you don't need 30x coverage And our 30x coverage in long reads is very different than 30x coverage in short reads.

Speaker 2

And I do think I'm actually really thrilled that The world is seeing that and some of our best customers are actually promoting that. So that's There's a great reason for you to be getting into long reads.

Operator

The next question is from Luke Sergut with Barclays. Please go ahead.

Speaker 8

Great. Thanks, guys. So I guess the first one, I just kind of want to get a sense of the timing and the strategy there from Aptone. I understand how it fits in the portfolio, etcetera. But I just you guys are in the midst of the biggest launch Of the company's history between the two instruments, is there a risk there That you could be biting off more that you could chew from an organization.

Speaker 8

I know that, Christian, you'll drive them hard enough. But just kind of thinking there from a timing perspective, why not build up some cash, get a successful launch out there and then do the deal because it was still an early stage Seed round, I guess. And then my second one is, as you think I know you're not going to give any orders or But it sounds like the orders were less than the shipments and you guys burned down some backlog. Is there something from The April timeframe where you were kind of going not full bore there, just any kind of color on the pacing of the orders

Speaker 2

And then I'll get to the backlog. With respect to Aptime, we have had this strategy to build maximize the value of SVB chemistry. We have built a team that is highly capable of executing and We'll still be working on anytime you launch a new platform, you're still working on that platform for a bit of time after. But the Apton technology is far enough along. They've been working on it for many years.

Speaker 2

It's far We'll have systems in San Diego and in Menlo Park so that we could start optimizing the chemistry right away. We think that's really, really important because as we start to gain some momentum with Onso and SPV chemistry in particular, We want to convert that momentum into routine usage, perhaps in liquid biopsy applications, for example, And routine usage is going to require high throughput. It's just there's no two ways about it. We believe that there's a market window where we can get A new high throughput product to market in a window that will make it highly competitive with anything else out in the world. And so that So time is certainly of the essence.

Speaker 2

You are right. We are pushing the team hard, but I actually think I'm not Pushing, I think everyone is pushing me just as hard, which is just such a great place to be because the company has never been in that position before. So Now is the best time to plant a tree is 30 years ago and the next best time is today. And with this acquisition of Aptown, it really gives us an incredible head start to accelerate the development, get a I throughput product to market have a complete portfolio, allows us to drive not only revenues, but stronger gross margins And really go to customers with a complete offering. So we're thrilled with getting this done today.

Speaker 2

And Quite frankly, we need to get it done today to keep pushing on our long term goals. With respect to the backlog, As I said a few minutes ago, we our orders for the quarter ended up where we were expecting them. We're on track For our year with respect to orders and our objective is to burn down some of that backlog. We are actively trying to do that Over the course of the year so that we can get more consumable revenue sooner. Consumable revenue sooner means Your gross margins get better faster, increases our ability to drive the cash flow positive, which is a really important consideration for the company right now.

Speaker 2

I don't think I go into a single strategic planning meeting without talking about cash flows as the First item on the agenda, maybe it's because I'm an old CFO, but I do think it's critical to create sustainability here In the face of increasing growth and I think we can do.

Operator

The next question comes from Rachel Zatienstol with JPMorgan. Please go ahead.

Speaker 7

Great. Thank you for taking the questions and congrats on the strength this quarter. So I wanted to dig into some of your comments on the gross margin line. Guidance now assumes non GAAP gross margins of 32% to 34% for the year. We also mentioned that that gross margin line can fluctuate based on So can you just walk us through what's actually contemplated in that gross margin guidance for the year?

Speaker 7

And then how should we think about the levers impacting that gross margin progression into 2024? Thank you.

Speaker 2

So Susan, do you want to cover the what's going On 23 and I'll kind of work into 24.

Speaker 3

Yes, so I'm happy to. So this year, we have baked in for gross margins to ASP Speed trends for Revio, and then also in addition, manufacturing efficiencies with manufacturing the Revio instrument. So if I start on the ASP side, you see that just in terms of calculation, the ASP has improved In Q2 relative to Q1 and given the backlog and the funnel we have ahead of us in terms of orders and insurance we expect to ship, We do expect that the ASP for the radio instrument will be consistent with where we were in Q2 or Slightly better than Q2, so that was baked into how we estimated our gross margins. And then also with respect to manufacturing the instrument, Our manufacturing team has done a great job of improving efficiencies with building that instrument. One measurement we have is touch time on building that instrument and that touch time has been coming down.

Speaker 3

It's come down in Q2 relative to Q1 And we are baking in incremental improvements in those efficiencies to build the Revio instrument, which is helping our gross margins. In our gross margins for the year 2 are the Revio consumables and we are improving in terms of yields and how we're doing there, which incrementally reduce the to manufacture consumables. So all of that has been factored in when we guide our year.

Speaker 2

Yes. And so that's helpful, Susan. And when you think about it, anytime you have a launch year, you certainly have lower gross margins. But we also had The complexity of a pretty fundamental product transition with SQL to Revio and also the kind of the lingering effects of COVID. So unfortunately, we did have We have had higher write offs in the Q1 in particular, which impacted our gross margin expectations for the year.

Speaker 2

And so Susan's right, as we continue to drive costs out of the system, that's We'll likely kind of achieve steady state by the end of this year and into 2024 on Revio. And so I think that those are really positive signs and positive signals that are going to help drive gross margins up. And finally, perhaps most importantly of all Is the fact that the Revio instrument can drive much higher consumable pull through and therefore the product mix will start to change, I would imagine later this year and into 'twenty four and probably into 'twenty five too that you start to see more of a traditional mix Consumables to instrumentation, which will also very significantly help our gross margin over the next few years here. So we're managing aggressively. The team is doing a good job, but we have a lot of work to do.

Operator

The next question is from Tejas Savant with Morgan Stanley. Please go ahead.

Speaker 9

Hey, guys. Good evening. Thanks for the time. Question, I know you don't want to comment on revenue orders and backlog. So maybe I'll take a different tack on that question because I think it's an important one.

Speaker 9

Can you help us sort of frame historically at what point in a product sort of launch cycle, Would it be normal to see the backlog start to come down? And any color on what kind of a backlog are you looking at in terms of where you'll be at year end heading into 2024? And then my second question really is On the Onzo side of things, I know you've excluded it prudently from the 'twenty three guide here. But as we think about that Onzo ramp in 'twenty four, Any sort of like thoughts and how you see that infecting based upon your feedback from early customers? Thank you.

Speaker 2

Thanks, Tejas. So starting with kind of the backlog and kind of traditionally, What happens when you have a new product cycle, oftentimes you first go to your existing customers and drive heavy Orders in that way and then you work to new customers. And so the order book would look like a bit of a Yes, kind of an increasing curve and then a plateau and then another increasing curve. Right now, I would say we're kind of in the we're still at the tail end of the increase And starting to be in that plateau phase. And what that means is that new customers Are starting are really taking notice.

Speaker 2

They want to see how the data is from the best customers. They want to make sure The system is working as intended. If you look at our sales funnel, our sales funnel continue to grow and be strong Globally, and so I do think our objective is to whittle the backlog down some. I do think that we see incredible opportunities for demand to and as a result, we've raised our guidance significantly this year. And we're off on a whole new trajectory as a company.

Speaker 2

And I think that's Really what we're seeing right now. So very excited about the order book, excited about we do have a super healthy backlog that continues To propel us forward, we've got to start whittling that backlog down so that we can make sure we get The consumable pull through and the consumable revenue, which will drive our gross margins, as I said before. Now the Onso ramp, You know what's amazing about Onso is that it's an instrument that we can reach with the same sales team and the same call point. And since we have a global organization, we can we've seen a lot of opportunity and a lot I think the majority of the early orders actually are coming out of Asia, for example. So we're seeing strong demand in Asia, strong demand in Europe.

Speaker 2

And this is where the emerging companies just don't have the capability that we have and the scale. And so I would expect us We'll go through the ramp in 2023 of manufacturing and making sure the robust in the market and providing our world class service and support so that we get great data sets out there. We've seen a lot of momentum building in the sales funnel and that's why it was so important for us to get across the goal line. As I Back in June, we had some validation and verification challenges that we were working through. We've largely worked through those now and we're scaling manufacturing.

Speaker 2

We're very happy. The runs that happened over the weekend for the first shipments here were fantastic. And so we're just we're really excited about where that product is going. And when we look at 2024, we're going to leverage our scale and really press our advantage scale wise with a product that I think is, has excited a lot of customers. And so, we'll see how we do.

Operator

The next question is from Ross Osborne with Cantor Fitzgerald. Please go ahead.

Speaker 2

Congrats on the quarter and thanks for taking our questions. So maybe just one for us on the longer read market broadly. Historically, I believe the company's view is that you Ross, those are good questions.

Speaker 1

It is difficult

Speaker 2

I would say customers use multiple technologies. And so when you start to say conversions, Yes. It's not it's a little more nuanced than that. But I do think when you look at scaled users, The example we pointed out in our opening remarks was really a scaled user moving from Nanopore to Revio because of the capabilities of Revio. In the past, we just never had the throughput or the economics to be Truly competitive even though we had higher accuracy, easier to use workflows, etcetera.

Speaker 2

But the reality is we just Scientists couldn't do the experiments they wanted to do. Now with Revya, we're actually penetrating all over With a product that really meets our customers' needs. And so I would say that broadly speaking, We for high throughput scale users, it's competitive, But we are seriously making inroads. And then there's a part of the most laundry market that nanopore Technologies serve that we don't serve and that's the kind of single use $1,000 low throughput part of the market, Which we're not really that engaged with because that's not where our focus is. And so I would say in the areas where we are Focused, we are highly competitive and both I think we already lead that part of the market, but we're gaining traction as well.

Operator

Today's final question comes from John Sauerbier with UBS. Please go ahead.

Speaker 10

Hi. Thanks for taking my question here

Speaker 9

at the end. So I

Speaker 10

guess now that you're 2 quarters into the Revio launch, just How are you thinking about the upgrade cycle from here from the SQL to? Is it 3 to 2, 2 to 1, 1 to 1? Any color there? And then I guess a follow-up on the Onzo. Just any color on the backlog mix on what are standalone Onzo orders versus revenue Onzo combo packages?

Speaker 10

Thanks.

Speaker 2

Yes. So John, it's a good question. I still believe that in the long run, it's More likely to be closer to 1 to 1, Revio to the SQL To install base than say anything else. I think in the early days, we have seen Probably more in the 3 to 2 or even 2 to 1 kind of Range, but I think that's because the system is 15 times more capable than the SQL 2. And so People are scaling into the platform.

Speaker 2

I'm leveraging a lot of gray hair and a lot of experience With launching platforms that are significantly more powerful than their predecessors. And so far, it seems like in my experience, almost every single case, You've seen a dramatic ultimately, say a couple of years post launch, that old install It largely does turn over to the new products on close to a one to one basis. It's still too early to see, but I don't think our view has changed any since our last quarter, our last call last quarter. And then lastly, With respect to the Onslow platform, I don't have the numbers right in front of me, but it's about it probably is about half, Right, maybe a little bit less than half are bundled deals of the orders we have so far, But I don't have the numbers right in front of me. My expectation is I think it's a really powerful unique offering that PacBio has and no other company has the ability to have highly accurate short reads and highly capable long reads in a bundled arrangement where you can you don't your technology doesn't drive your experiments, What kinds of applications and what kinds of answers you're looking for drives what your decisions are And given our ability to work very closely with our customers, perhaps maybe in a different way than others, I do think Can give our customers a lot of confidence that when they come to PacBio, we're going to serve them and really focus on meeting their needs with great technology.

Speaker 3

So thank The only one thing I was going to add, John, is with respect to the so we gave the statistic that there are 100 customers that have ordered a Revio system. And if you compare that even to the installed base of SQL 2, that's about a third of customers will have a sequel to and so the vision that the Revio will access more and more of the market and more new customers even by the fact that The number of orders coming from new customers is 40% and we expect that to be the case going forward for the next couple of quarters. We are accessing more of the market and so the installed base of Revio, we expect it to be much larger than the SQL-two.

Speaker 4

Sure.

Speaker 2

Perhaps that's a great place for us to wrap up for today.

Speaker 1

Yes, sounds good. Yes, thank you all for joining us today. This will conclude our call and a replay of today's call is available on our Investors section And we look forward to updating you throughout the quarter and the rest of you on our progress.

Operator

Thank you. The call has now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
Pacific Biosciences of California Q2 2023 & Acquisition
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