Thank you for standing by, and welcome to the Pacific Biosciences of California Inc. Fourth Quarter 2020 Earnings Conference Call. At this all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the conference over to Trevin Rard. Please go ahead.

Thank you. Good afternoon, and welcome to the Pacific Biosciences Fourth Quarter 2020 Earnings Conference Call. We hope that, you're keeping well during this time. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or alternatively as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

Thank you, Trevin. And good afternoon, and thank you for joining us today. Before we begin, I'd like to everyone know that Ben Gong, our Vice President of Finance is retiring this quarter. As a result, this is his last earnings call. On behalf of all the employees at PacBio, Susan and I would like to thank him for his significant contributions to the company over the past decade. Before the market opened this morning, we announced that SoftBank is making an investment of $900 million in the company to support the acceleration of our growth initiatives. We are excited to partner with SoftBank as they can help us expand our reach on a global scale. We believe that this investment validates our leadership position in long read sequencing and will help us -- enable us to accelerate the expansion of our product portfolio, expand our commercial footprint and ultimately to realize our vision that whole genome sequencing using our technology will become a fundamental tool for the use in a broad range of both research and clinical applications. On our last earnings call, I described some of our key priorities and I am pleased to report that we're making progress on a number of fronts, including our ability to execute and grow the business. For my prepared remarks, I will briefly review our Q4 financial highlights, and then describe key business highlights and summarize our expansion efforts, including the addition of several key management hires. Susan will then walk us through the detailed financials for the fourth quarter and provide some thoughts around our outlook for 2021. So starting with an overview of our Q4, 2020 financial results. Total revenue for the quarter was $27.1 million, up 41% sequentially from Q3 of 2020. We exceeded our internal Q4 target for revenue and we did not see a significant negative impact from the COVID-19 pandemic during the quarter. Instrument revenue was $13.6 million, up 76% compared to Q3 of 2020. Our newly launched Sequel IIe was well received by our customers, which drove an increase in orders. Additionally, we received several multi-system orders from customers like the Wellcome Sanger Institute and Berry Genomics. We delivered and installed 35 new Sequel II and IIe systems during the fourth quarter and ended the year with an install base of 203 Sequel II and IIe systems.

Thank you, Christian and good afternoon, everyone. Despite Q4 still being impacted by COVID-19 headwinds the PacBio team delivered a very solid quarter that included sequential growth in bookings revenues and gross margins. As Christian mentioned, the Sequel IIe launch was stronger than anticipated which resulted in orders in the fourth quarter exceeding our internal expectations including a number of multi-instrument orders from key customers. Total fourth quarter revenue was $27.1 million an increase of 42% from $19.1 million in Q3 of 2020, but a decrease of 3% from $27.9 million in Q4 of 2019. The revenue breakdown was as follows: instrument revenue recognized in Q4 was $13.6 million an increase of 76% from $7.7 million recognized in Q3 and down from $15.3 million recognized in Q4 of 2019. We installed 35 Sequel II and IIe systems during the fourth quarter growing the install base of Sequel II and IIe Systems to 203 as of December 31. As the consumables are the same and customer usage patterns are expected to be similar across the Sequel IIe and IIe systems, we will continue to report a combined install base going forward. Consumable revenue for the fourth quarter of 2020 was $10 million, up 25% sequentially from $8 million sold in Q3 of 2020, and up 8% from $9.3 million sold in Q4 of 2019. The sequential growth in consumable revenue reflects increased utilization on our growing install base of Sequel II and IIE systems as well as the usual end of year stocking of consumables inventory. Since the start of the COVID-19 pandemic that resulted in our customer labs being shut down, we have since continued to see meaningful increase in our Sequel I and Sequel IIE utilization such that we have recently crossed a cumulative five petabases sequenced on our…

Thank you, Susan. To wrap-up our prepared remarks, I'd like to reiterate our three core objectives for 2021. First, we plan to dramatically expand our commercial footprint so that we can serve more customers around the globe. Secondly, we plan to accelerate our product development pipeline with a focus towards increasing throughput, lowering costs, developing end-to-end workflows; and finally, developing a multi-product portfolio so that customers have access to the right long read sequencer for their scale and applications. And thirdly, we're focused on moving our smart technology deeper into the clinical diagnostic market where we believe we have unique advantages over other sequencing technologies. This will be done through the execution of high-quality partnerships such as the one with Invitae that we announced in January. My opening remarks touched on a number of specific accomplishments the team made toward executing on these strategies. Moving forward we expect to increase our engagement in the global fight against COVID as we believe that HiFi reads can make a significant positive impact. You'll see us work to expand our global network of collaborators in rare and inherited diseases who seek to leverage pack by HiFi reads to solve 50% of the cases that elude diagnoses with other technologies today. In closing, we have a strong finish to a challenging 2020 and although headwinds associated with the pandemic still exist, I believe our core strategies, expanded leadership team, and improved execution will drive growth in 2021 and beyond. And finally, SoftBank's investment of $900 million provides us with the financial resources to work towards achieving our objectives. I believe we have a significant opportunity in front of us and I'm excited about our future. That concludes our prepared remarks and with that, we'd like to now open it up for some Q&A.

Your first question comes from Doug Schenkel with Cowen. Your line is now open.

Hey good afternoon everyone and thank you for taking my questions. First off thanks Ben for all your help over the years and good luck on the next chapter. Christian, I want to just talk about kind of I guess a high-level strategic question. Illumina in attempting to acquire Pacific Biosciences was essentially attempting to go from being just a short read sequencing company to be in both short and long read. It's been asserted that PacBio could almost reverse that playbook essentially going from being the dominant long read sequencing company to be in both long read and short read. With that in mind, how are you thinking about the best way to achieve that? Is it organic or is it inorganic? And part of the reason I start with this question is with the investment from SoftBank, does it change how you think about that question of organic versus inorganic?

Well, Doug, first of all, it's good to hear from you and thank you for the question. When you think about this question, I'm going to first start and address what does the SoftBank capital do for us. There's no question that it gives us a lot more flexibility to think about how we can create scale, how we can create a multiproduct portfolio, and how we could drive our business forward faster. And I think one of the things I'm very interested in is a combination of organic and inorganic opportunities and I think the inorganic opportunities are more accessible to us of course now that we have some more capital to work with. With respect to the specific strategy of short read/long read, long read/short read, I think if you step up a higher level and try to think about what we can be as a company, we want to be the most advanced biological solutions company with a number of different products in our portfolio and that could encompass obviously long reads, where we're going with that in our leadership position and driving the accelerated development of products there. It could encompass short reads, there's obviously large markets that are uniquely accessible to short reads at least today. And then -- but it also could encompass market adjacencies, complementary technologies, abilities for us to look at the -- the front end of our workflows as well as the back end. So developing those complete solutions for our customers. And I think right now we're just so thrilled to have this relationship building with SoftBank to give us the capital we need to think big because I do think with our leadership team and our long read HiFi sequencing capability, we have a lot of opportunity in front of us.

That's super helpful. Thanks for that Christian. And then maybe if I could just ask a second question on another recent development. You shared some additional details on the agreement with Invitae which of course was a really exciting development over the last several weeks. Regarding the five-year duration that you outlined, I just want to clarify does that mean that this is an exclusive with Invitae over this period? And does that mean that's the expectation in terms of when there would actually be an instrument commercialized? I just want to maybe unpack a little bit about what happens during those five years and what comes after. And you also talked about the concept of essentially being able to have an industrialized PacBio instrument that would be well suited for larger central labs like Invitae, but not limited to Invitae. Is there a scenario where this agreement also leads to the development of instruments that are more well suited for clinical applications in a more decentralized approach? Thank you.

Yes. There's a lot to unpack there Doug, but let me see how I can do. First, the agreement with Invitae is not an exclusive arrangement for any period of time, but rather it's our -- we are developing -- we're embarking on a long-term collaboration with them to develop multiple products. So the first product is much closer than five years out. And that product will be this ultra-high throughput sequencer that will give Invitae the power to do whole genome sequencing at production scale at prices substantially below $1000. I believe I said that in the press release in January. What the unique feature is of course is that we will be giving Invitae preferential pricing, but we will also be free to market that product and that sequence broadly to a number of different customers. And as you could imagine, we will leverage that technology to develop potentially offshoots of that product for more decentralized situations or different levels of throughput or capability so that we can meet the needs of the market. I think this is one of the core strategies that I've been talking about since I joined the company was developing a product portfolio that reaches each customer in the way they want to be -- in the way they want to do sequencing. And it does start at the high-end with Invitae. But you can imagine that the technology is -- will be applicable across a broad spectrum of customer types and applications. And so that's where we'll go from there. We will have products beyond this first product with Invitae, but that will be -- those will impact themselves over time of course. So hopefully that helps a little bit for you Doug?

Yes. Nicely done Christian. That's sort of a lot. So thanks for all that color. I’ll get back in the queue.

Great. Thank you, Doug.

Your next question comes from Tejas Savant from Morgan Stanley. Your line is open.

Hey, guys. Thanks for the timing this evening. Christian, can you share a little bit more color on sort of your early popsy conversations here? For the existing projects, you're participating in including all of us in Darwin Tree of Life. How should we think about sort of the consumable pull-through on the Sequel in 2021 and beyond?

Yes. Thank you for the question. My expectation is that, as these projects ramp, they would be optimizing their Sequel II platforms and therefore, be running likely at the higher end of our pull-through metrics. And so that's how I would be thinking about it. And in some cases, if they want to accelerate maybe they'd be expanding their infrastructure. Now interestingly these are large projects and there's a lot more to the story than just doing the sequencing. It's getting the samples. And the reality is that's a slow process. And it takes a while for these customers to get the process get them ready for sampling and then ultimately get them on the sequencer. And so we would expect them to be scaling up. COVID has not been our friend in this area. But as the world starts to open back up, we would expect them to be ramping up accordingly, and then likely operating at the higher ends of their -- of our pull-through metrics to be sure.

Got it. And then one on the instrument side. To what extent, did some sort of order push-outs you mentioned last quarter come through in the fourth quarter here in the 35 installs? And it looks like you expect instrument revenue momentum to continue in the first quarter here. So is that -- I'm just trying to parse out, how much of that is just more catch up versus sort of strength in the order book and new orders that came in 4Q?

Yes. I think there was -- I think there was definitely some strength in the order book in 4Q. And as I talked about there were some installations that we couldn't get across the goal line because we couldn't travel. So hopefully, those will get installed in Q1. But I think there's -- the Sequel IIe is a very powerful instrument in the sense that it allows us to reach into customers that don't have the compute infrastructure. And that coupled with the excitement around COVID surveillance coupled with the accuracy of HiFi and the precision FDA studies that have been done to show how powerful our system can be on that front, basically or generally increasing demand across the board and getting -- a lot of customers are excited about where we can take this technology. So I think in Q4, the Sequel IIe launch helped us some of that will -- is carrying over into Q1 and I suspect we'll be a pretty common theme throughout the year.

Got it. And one final one for me here on the IIe actually are you starting to see early adopters of the platform perform more long read sequencing given the time data storage and compute cost savings generated by the enhancements?

It's a little too early to tell. Usually, when you launch a new system it takes a quarter to two to really kind of see where the metrics might settle out. And so why don't we try to update everyone on that as we get a little bit deeper into the year here.

Got it. Fair enough. Thanks.

Yes. Thank you.

Your next question comes from Tycho Peterson with JPMorgan. Your line is now open.

Hey, thanks. I'll add my congrats to Ben as well. It's been great working with you over the years. Christian, I want to go back to the $900 million infusion from SoftBank and I understand it's early days looking at organic and potentially inorganic investments. But one of the questions we got today is whether this can help accelerate the time line to the $1,000 platinum grade genome. You've been kind of marching down this path for a while. To what degree, do you think it can help accelerate some of those developments?

I think it can clearly help, because we will be aggressive in investing. I think what it probably does more than maybe it shaves a little bit of time off, but it also helps improve the certainty by which the time goes. And so when you get into these complex development projects as you can imagine you're trying to manage to a goal line to get a product out to market, but you're also trying to make sure you stay focused and get the right product out on time. So, although we may be able to bring the timeline in some, it's more likely that what it will do is help us prevent the time line from getting pushed out too much if that makes any sense Tycho.

It does, yes. And then on Invitae, I know you said, no revenues here in the near term. I just want to make sure there's no milestones that could be triggered as part of the program. And then to what degree do you think payers are ready for whole genome in the clinic? Or are you going to have to do some heavy lifting on that front?

Yes. That's a good question Tycho. So with respect to revenue, obviously, Invitae is a customer already. We've talked about the collaboration we're doing with them on the epilepsy project. So we will have revenue from that side. But with respect to the collaboration, it really is a true partnership, where they're going to -- we have a joint steering committee. In fact our first joint steering committee meeting is I believe next week our first significant. So there's planning and that we're already starting down the development pathway. And so Invitae will be reimbursing us for that. So we'll see cash flows, but not revenue as kind of Susan outlined. And we'll see that sooner rather than later. And I'm sorry, I forgot the other part of your question there Tycho.

Payers or are payers ready for whole genome sequencing.

Yes. So I think the question becomes -- the question is all about, what's the value of the genome and what's the price? And I believe that we with Invitae will be able to price the genomes at a low enough price that it will be competitive with other types of tests out there. So, for example, exomes and other types of things. And if you can continue to demonstrate, the increased diagnostic yield, which we're seeing through a number of our collaborations then it becomes likely that payers are going to be more excited to actually pay for these things. That being said, each payer is going to be -- particularly in the United States, each payer is going to be its own entity and we're going to have to work with them. And we're going to put -- that's another great reason why we've decided to do partnerships here, because the Invitae team has a lot of expertise in that area. And we will build some expertise, but the truth is we want to rely on our partners if that makes sense.

Yes. That's helpful. And then last one on the COVID front. I'm just curious how you're sizing the viral surveillance opportunity? And how much of the variance sequencing do you think ends up being done on short read versus long read?

Well, I think the -- we haven't put -- I don't have an answer in terms of absolute sizing at this point. I know there's a lot of funding that's coming into this area through -- we just saw an appropriation of over $1 billion that is trying to get through Congress right now, which I think is only good for us. We're seeing it on a global basis though. We're seeing in Germany in the UK, et cetera. And -- but I think that long versus short will really be dependent on how quickly we can get into the market. One thing I would say is that our long read sequencing capability, the pricing is extremely competitive with short reads and the information you get is fundamentally better. For example, you get all the phasing information, which allows you to really understand what's going on in a much deeper way. And so we're absolutely price competitive. The LabCorp protocol that we've talked about you can multiplex up to 900 samples per run and so it's just a very compelling value proposition. And it's up to us -- I think the answer will be it's up to us in terms of how fast we can move and get in front of the right people. And we're making a lot of progress there already.

Okay. Thank you.

Your next question comes from Rachel Vatnsdal with Piper Sandler. Your line is now open.

Hi. This is Rachel on for Steve. Thanks for taking the questions tonight. So in the clinical space, you guys have announced a number of impressive partnerships so with the Asuragen and Children's Mercy and others. What else can we expect to see from PacBio in the partnership segment? And how should we think about the cadence of these new clinical partnerships? And then, also, given your new capital influx, will you guys be pursuing clinical applications on your own or you stick with partnerships in the near term?

Yes. I think strategic -- thank you for the questions. I think we have aggressive internal goals on launching more clinical partnerships. And I would expect them to look similar to what we're doing for example with Children's Mercy. For example, focused in rare and undiagnosed disease as our first real area to continue -- with our objective to continue proving why a PacBio HiFi genome is so important in the clinic and why that's so useful. And so, I would anticipate that we would be trying to put at least -- put several in place this year. And I just -- it's a bit aperiodic as each deal takes its own -- life of its own to get them across the goal line. I think one of the things that the capital does is it allows us to think much more creatively about how we get into these partnerships, how big they can become because we have the financial wherewithal to help really drive and build this market out. With respect to pursuing clinical applications on our own, we're still of the belief that our core competencies are creating the great technology and partnering with others. And so, our general preference is to be partnering with others with that core expertise and possibly in certain situations developing our own clinical product or capability. But we really want to be known as the company that's willing to partner with all of these clinical providers and build our business that way because we think that will make more sense for us over the long-term.

Great. And going off of that, so as you guys continue to lower the cost, what new markets do you think will be the first to consider shifting to a long read platform in the clinical space really like beyond the clinical partnerships that you have so like rare diseases for example? And could you talk about the sizes of those opportunities and what you guys need to do to start to capture those markets? And that's all for me. Thanks.

That's a mouthful for sure. Mark Van Oene is on the line. Maybe Mark wants to talk a little bit about some of the areas where we think long reads can penetrate. Mark, do you want to try that one? Sorry, we're remote too. So, it makes it a little trickier.

Yes. Happy to take that one on for you. So, I do think there's a big opportunity still for longer sequencing. And Christian talked about segmenting the portfolio. And I'm going to just reiterate there's nothing more important than delivering on this product and the entire workflow for the Invitae collaboration and getting into the clinical whole genome sequencing opportunity. But I do see a big opportunity for us to deeper penetrate into labs with the Sequel IIe or extensions of that Sequel IIe is the thousands of Tier 2 core labs or the thousands of clinical testing labs that will require the partner and build out the workflows and automation and reporting in ways that we just haven't up until now. So I think expanding our commercial efforts is critical for us to getting into that new segment of lab. So think of that as just lab penetration for long read sequencing. There are also a number of extensions of markets that long reads already will benefit. And when I think about clinical applications here, it's differentiation with HLA testing for transplants or pharmacogenomics or No-Amp regions. And so, it's not just clinical whole genome sequencing. I do think there's a big clinical targeted market opportunity for long reads. I also think we're way underpenetrated in transcriptomes. And so the ISO-Seq type applications to look at full-length isoforms. And look at the isoforms that exist and spring pull those in with either single cell or bulk RNA studies is a great opportunity for us to start to explore, especially if you think about clinical oncology. And then, what I always say to people is we just don't know yet what the next applications are going to emerge, because not enough people have been using the technology. And so, as we scale our customer base, I expect it to be a series of new applications that are going to emerge for us to take on and commercialize and get to the market.

Perfect. Thank you.

We have a question from Kyle Mikson with Cantor Fitzgerald. Your line is now open.

Hi, guys, thanks for taking the questions. And I want to congratulate Ben. It's great work with you for the past -- over the past year or so. And then also congrats on the investment from SoftBank. And I know it's been asked a bunch of times during the call, but can you just help us think about the uses of cash over the next few years as it relates to this investment in particular? And I know there's a ton of ways to allocate capital but in the near-term how are you prioritizing some of those buckets like the sales force and product development, the back end technology like you mentioned Chris then maybe some of the acquisitions? I'm just curious what your, kind of, perspective and what your thoughts are regarding the prioritization of that you want the inflow of cash? Thanks.

Sure. And thanks for the question. When you think about prioritization, the first thing we have to do is go back to our core strategies of what are we trying to get accomplished here over the next couple of years. And the first thing where there's low hanging fruit and direct revenue growth opportunities is scaling our infrastructure on the commercial side. You heard Mark talk a lot about several different applications where we have a very small presence today, yet we have very powerful technology and capabilities. There are thousands of laboratories out there, many of which we just don't even call on. And so I think you'll see us continue to accelerate our -- the money from SoftBank helps us accelerate that opportunity. For example, in Europe, although we were budgeting a significant growth in headcount, because we really are underpenetrated there. Now we can think bigger about how do we fully build out that team and how do we take advantage of this incredible opportunity with, for example, COVID surveillance sequencing to build out our capability across the board. So I would say commercial scaling is still going to be front and center. On the R&D front, the ability to take on multiple projects simultaneously is a core competency that we are building. And that requires more infrastructure around the R&D team, not just the R&D people itself. So it's project management, its strategic planning and so that we will be investing incremental resources to enable us to ensure we can be successful at developing multiple products at the same time. And I think that's core of our technology -- or core to our strategies because if we can get that multiproduct portfolio, accelerated and into the market then we can reach more and more customers and…

And, Kyle, this is Susan. I'll just add just a couple of comments with respect to this year. In terms of our organic investment, I had talked a little bit about it during my prepared remarks. But to put it into perspective, in terms of the investments that we're making to drive for long-term growth, we are adding over 100 headcount across the company, whether or not they all come on board, it still remains to be seen but we are pushing, hiring quite a bit and so you'll see us ramp and our operating expenses will ramp accordingly.

Okay. Thanks, guys. I really appreciate that. And I guess just sticking with this theme I don't keep kind of light. But Chris you referenced, the $20 billion TAM last month. I just wanted to hear your view if this investment kind of accelerates your ability to penetrate deeper or expand I guess in that market? And then you were talking about which markets could be accessible in the near-term. But just as it relates to both accelerating the push into those markets is this tailwind to headwind? Just wanted to hear your thoughts there. I appreciate your comments. Thanks.

Yes. No, it's a good question. And the truth is, we wouldn't have taken this investment if we didn't think there was opportunities for us to accelerate our potential into these large TAMs. The sequencing market is only getting larger. We have a clear opportunity to lead at the whole genome level of sequencing. And we have a clear opportunity to create a great business around other aspects of the market like Mark outlined earlier. And so this investment really brings an incredible partner to the table in SoftBank. And their reach and their resources I think will help us expand our business straight away. But then over the long run here we will be able to take advantage of having this capital to accelerate our opportunity into these TAMs and drive growth. And that's really -- at the end of the day my core strategy is how do we drive scale and growth as quickly as possible. We have an incredibly powerful set of technologies already but what can we do to go even faster. And that's what we're going to be working on.

Got it. All right. That's perfect. I appreciate your answer there. And I just wanted to talk about Invitae agreement a little bit. It's obviously very promising. Congratulations on it. Of course will the spending -- you mentioned like $20 million to $25 million in expenses I guess in 2021 Susan. Is that going to be kind of back half loaded? I just wanted to understand how to think about that. And then also I guess the sequencer will be level II Invitae for favorable pricing of course. But in terms of broader commercial adoption like for other customers, I believe you mentioned that Christian, when could that occur within this five-year kind of time line? I wasn't quite clear on that. Thanks.

Yes. So -- go ahead Susan with the dollars. No go ahead with the dollars and then we'll go from there.

Yes. So I'll give you an indication Kyle of just in terms of how that investment will ramp over time. So as Christian mentioned, we have kicked off. We're ramping in terms of hiring as well as the expenses associated with the development of the new platform. We are -- we have our joint steering committee kick off that is happening next week. And so I would think of it as Q1 because we're here in February, Q1 will be lighter. But then for the most part the rest of the year will be pretty linear. Q4 is probably slightly more than obviously Q1, just given the nature of ramping a whole new program within the company.

Yes. And with respect to the products, there is no time associated with. In other words, once we get the product built, the new sequencer built, we'll be able to broadly commercialize it and scale it accordingly. Of course, we're going to give Invitae priority. Any time you develop a new product, the first -- as you go through the scale up we're going to focus exclusively on Invitae, but that's not because they have an exclusive right. That's just because they are a partner and collaborator and we want to ensure that they are absolutely successful and we're so thrilled to be part of that with them. But we will be able to quickly commercialize that product as we ramp up accordingly.

Okay. All right. Thanks. And I know I heard you mention the non-exclusivity. I guess that's part of it. So thanks for that. Just one last like softwall kind of question. So I know you guys have released some -- or I guess total source here really has some of this like pediatric and rare disease, data kind of regarding the partnership with Children's Mercy Kansas City. But when can we see some new diagnostic proof statements coming out in the near term? And I know they're presenting at AGBT. I was wondering if there could be any update there regarding new data? Thanks.

Yes. I mean, I think we'll leave that to our collaborators as they -- we don't want to steal their thunder. But the reality is that there's a lot of great work going on. We're on the road to pursuing several new partnerships. And one of the things you can also see HudsonAlpha just released some data just recently over the last several days or the past week. And so you should check out the HudsonAlpha release because that's a very powerful proof statement.

Okay. Congrats on the progress and all the updates guys. Thank you.

Thank you.

Thank you very much. Thanks for the support.

There are no further questions at this time. I will now turn the call back to Christian Henry for closing remarks.

Well, thank you everyone for joining us today. And we look forward to speaking with you on our next call. And if you have questions in the future, please feel free to reach out. So thank you very much.

This concludes today's conference call. Thank you for joining. You may now disconnect.