Good day, everyone and thank you for standing by. Welcome to the Pacific Biosciences of California Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speakers presentation, there will be a question-and-answer session.

I would now like to hand the conference over to the Director of Investor Relations, Mr. Todd Friedman. Please go ahead, sir..

Good afternoon and welcome to PacBio's third quarter 2021 earnings conference call.

Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com, or alternatively as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Christian Henry, President and Chief Executive Officer; Susan Kim, Chief Financial Officer; and Mark Van Oene, Chief Operating Officer. Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including providing predictions, estimates, plans, expectations and other information.

You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties and may differ materially from actual results. These risks and uncertainties are more fully described in our press release issued earlier today and in our filings with the Securities and Exchange Commission.

We disclaim any obligation to update or revise these forward-looking statements. In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of our 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. I'll now turn the call over to Christian..

Thank you, Todd and good afternoon, everybody. Thanks for joining us. On today's call, I will start with a brief update on our strong third quarter performance.

Next, I will discuss the progress we are making in some of our target markets and finally, I'll share how both PacBio and the research community more broadly are innovating to further drive the utility of HiFi sequencing. Then Susan will discuss our financial results and full year guidance.

Q3 marked another successful quarter as we continue to make solid progress against our strategic initiatives. We achieved another all-time record for revenue in the third quarter, with product and services revenue of $34.9 million, an 83% increase compared to the third quarter of last year and a 14% increase over the second quarter of this year.

We installed 44 Sequel II and IIe systems which is also an all-time quarterly high and brings our total installed base to 326 units, almost double the installed base we had at the end of the third quarter last year.

Sequel II and IIe is now the most installed PacBio sequencer in the history of our company and we are on pace to break our record for the most sequences placed in a single year.

Nine of our system orders were new to PacBio instrument customers from across all regions; this is encouraging as it demonstrates our investment in developing a world-class commercial organization is enabling us to reach more customers than ever before.

As of the end of the quarter, we have doubled our quota-carrying sales team, achieving that goal a quarter ahead of our plan. Additionally, the product enhancements that we made over the past year are providing more value to our customers which is driving adoption of our platform.

Over the past year, we've been working to develop tools to help us understand our growth in specific target markets. And today, we're pleased to provide some insight into the revenue contribution from these key markets. We will provide this information periodically.

Additionally, please note that the size and relative growth rates are approximate and intended to be used as directional in nature. First, the human germline market is our largest and fastest-growing and contributes just over one-third of our total revenue year-to-date.

Included in this market are translational research customers, focus on areas like rare and inherited disease, carrier screening, pharmacogenomics and HLA as well as population genomics and other research initiatives.

Human germline includes customers like Children's Mercy Research Institute which is showing signs of success using PacBio HiFi in the genomic answers for kids program. Recent findings from the institute help substantiate the use case for accurate long-read sequencing in the clinical research setting.

The program has completed over 600 HiFi genomes to date and then covered multiple diagnostic findings attributed to disease, including structural variants, single nucleotide variants and repeat expansion disorders that were not found with previous sequencing methods.

Specifically, HiFi WGS uncovered over 4x more rare coding structural variants than short-read WGS and found variants and genes of unknown significance in over half of the undiagnosed cases. These genes or variants may prove one day to be pathogenic and provide insight into unanswered questions today.

Outside of rare and inherited disease, customers in our human germline focus include Prenetics, a leading genetics and diagnostic health testing company and a new instrument customer in Q3 that installed a Sequel IIe to further differentiate it's carrier screening test outside the United States.

It also includes existing PacBio customers like Berry Genomics. Barry announced last week, they received NMPA approval for the Sequel II which they will brand as the Sequel II CNDX in China as a clinically qualified system.

This approval is an important step for them to submit data for clinical trials and it's plan for selling the Sequel II directly to hospitals. This milestone also marks the first regulatory body to approve a PacBio instrument.

Other programs in our human germline category includes the human pangenome reference project which uses PacBio sequencing to build a more diverse representative reference genomes. The project has already been made available over 40 reference quality human genomes to researchers around the globe and expects to complete hundreds more.

Moving on, the plant and animal market with the myriad of diverse and complex genome continues to be a main staple for highly accurate long-read sequencing and year-to-date represents just under one-third of our revenue.

This category includes initiatives like the European Reference Genome Atlas which is leveraging PacBio HiFi sequencing to help generate reference quality, complete and error-free genome assemblies towards it's goal to ultimately assemble at least 200,000 plant and animal species across Europe.

It also includes customers like the USDA which installed multiple Seque IIe's in the third quarter, utilizing their remaining year-end budget.

We're encouraged by the USDA's progress towards it's five year science blueprint and it's goal to use WGS to tap into genetic diversity and use genomic technologies to accelerate breeding progress, decrease susceptibility to climate change, pests and diseases and increase yield potential.

Next, roughly 20% of our business comes from infectious disease and microbiology applications which includes customers like Drexel University who installed a Sequel II/IIe to address it's needs for COVID-19 research today and to have a pathogen surveillance solution on hand that prepares them for the next emerging threat like respiratory infections.

Also related to infectious disease and microbiology, Inqaba Biotech, our African distributor has partnered with the African Center of Excellence for Genomics of Infectious Disease to place the first Sequel IIe in West Africa.

Professor Christian Hoppe will implement HiFi sequencing at the center to fill the gaps from other short and long-read technologies and to help provide a more complete genetic picture of viruses and microorganisms. Finally, just about 10% of our revenue today comes from oncology and emerging applications.

While still nascent today, long-read sequencing has been demonstrated as a useful tool in emerging applications like gene therapy, CRISPR and synthetic biology and we see a growing list of publications and studies supporting the use of PacBio Technology in these areas.

What's exciting to me is that as we reach more customers, we expect to see important new applications of long-red sequencing emerge which will further catalyze our growth. Finally, we expect the addition of a short read sequencing platform to drive growth in oncology applications upon it's launch.

One of our core strategies to accelerate the adoption of HiFi sequencing has been to develop end-to-end kitted solutions to make PacBio sequencing accessible to more labs and to simplify customer workflows. One of these kitted solutions includes our HiFiViral kit for COVID-19 which we expect to launch in the coming weeks.

HiFiViral allows customers to scale genomic surveillance testing quickly and efficiently with an accurate and robust solution to capture all variants, including novel mutations. In our view, it also offers a simpler kit than protocols from other providers with fewer reagents and less pipe heading at a very competitive price.

The University of Louisville, for example, explained that their early access use of HiFiViral allowed them to reduce hands-on time by 80% and while improving mutation detection compared to PCR amplicon approaches used by other sequencing technologies. We are extremely proud of this assay design.

Our team developed a robust product with redundancy and capture design, allowing HiFi viral to catch emerging variants and we've already seen it identify novel variants missed due to the other assays fixed designs. We look forward to sharing more when we officially launch the kit in the next few weeks.

Beyond HiFiViral, we plan to also release an updated end-to-end microbial genome assembly application on the Sequel IIe system. This update doubles the current multiplexing capacity while continuing to deliver the industry's leading standard for reference quality microbial genomes.

Together, these two releases provide public health and microbial research labs with a powerful menu of applications to service a broad range of use cases on their Sequel IIe platform.

With this exciting set of improvements for WGS, we're continuing to build on PacBio's unique ability to simultaneously detect not only the genomic information but also the epigenetic signature.

We're expecting to bring an updated and vastly improved version of this feature to the Sequel II and IIe platforms early next year and have received immense interest in this feature at ASHG last month. Customers are already talking about seamlessly adding ethylation to their PacBio sequencing runs to bolster their research.

As you can see, we're committed to making HiFi sequencing not only the highest quality but also the easiest to use and the most complete data type available. With the addition of Circulomics in the third quarter, we are already beginning to see progress in simplifying and improving the long read sample prep.

This past quarter, the team collaborated with the Coriell Institute for Medical Research to develop a high molecular weight DNA reference product based on it's NIGMS and NHGRI cell repositories which are among the most widely used repositories in genomics research.

Coriell's adoption of Nanobind is a testament to the superior quality of the technology and the growing demand for long-read sequencing which often requires high molecular weight DNA.

We are pleased to have a solution in-house that addresses this important part of the long-read sequencing workflow and we're fully committed to supporting customers on any platform.

In the backdrop of all these improvements, we're pleased to see data published in September from the Association of Biomolecular Resource Facilities that compares major commercial short and long-read sequencing technologies which affirms PacBio as a leader in accurate and complete sequencing.

Specifically, the publication shows that circular consensus reads or HiFi reads had the lowest error rate of all technologies and the highest mapping rate and the highest precision in calling variants in clinically relevant regions. And there's still headroom to make HiFi more accurate as the scientific community keeps pushing their boundaries.

The genomics team at Google Health, for example, shared a feasibility study on the deep consensus tool that builds on PacBio software to produce even more accurate HiFi reads. According to the preprint, the software reduced read level errors by 42% and increased total HiFi yield by approximately 9%.

The tool also increased the yield of Q30 and Q 40 reads. Similarly, the PacBio team collaborated with bioinformaticians at NVIDIA, in a study to train deep learning models to polish HiFi reads and reduce errors by 25% to 40%. As you can see, sequencing accuracy is a North Star and we'll continue to invest in raising the bar.

Improved accuracy has the potential to translate into more clinically relevant genomic discoveries, more complete and better reference-grade genome assemblies, both human and non-human and higher sensitivity to novel mutations in viruses and bacteria.

As we expand our installed base and get HiFi sequencing into more customers' hands, it creates an environment where researchers can push the boundaries of Sequel II and it's addressable applications.

The Broad Institute, for example, recently published their MAS-ISO-seq protocol which has the potential to transform the way single-cell and RNA-Seq are performed.

According to the Broad, this new protocol achieved up to 22x improvement in throughput, generating up to 40 million isoform reads per 8M smart cell and is fully compatible with most protocols that generate full-length CDNA, including existing 10x genomics single cell CDNA libraries.

Not only is this a breakthrough in the amount of single- cell data obtainable in a Sequel II/IIe run but deciphering full-length isoforms is something currently unattainable on short-read single-cell sequencing or site-SEQ. This is especially important as their unique isoforms associated with specific cell types relevant to cancer and disease.

Finally, 1.5 month after we completed our acquisition of Omniome, I'm pleased to report our development timelines remain on track globally to launch the first platform using the Omniome technology in the first half of 2023. Our combined R&D teams are making solid advancements, leveraging each other's expertise.

We have seen an increase in the number of invention disclosures submitted, including dozens of new disclosures, leveraging the synergies between the company's technologies. With that, I'll turn the call over to Susan to discuss our financial results.

Susan?.

Thank you, Christian. As discussed, we are pleased to report another record revenue quarter in the third quarter of 2021, with $34.9 million in product and service revenue which represented an increase of 14% from $30.6 million in the second quarter of 2021 and an increase of 83% from $19.1 million in the third quarter of 2020.

Instrument revenue in the third quarter was $15.9 million, an increase of 12% sequentially from $14.3 million in the second quarter and a 106% increase from $7.7 million recorded in the prior year quarter. We delivered 44 Sequel II and IIe systems during the third quarter, growing the installed base to 326 systems as of September 30.

Turning to consumables. Revenue of $14.6 million in the third quarter grew 19% sequentially from $12.2 million in the prior quarter and was up 82% from $8.0 million in the third quarter of last year.

The growth in consumable revenue reflects increased smart cell usage as a result of our growing install base of Sequel II and IIe systems and increased average utilization per instrument.

Sequel II and IIe consumables represented approximately 85% of our total consumable shipments in the third quarter, with the rest from older systems and other consumables. Annualized pull-through system on the Sequel II and IIe install base in the third quarter remained relatively strong at approximately $175,000.

We continue to observe increasing utilization from customers connected to our smart fleet network, further evidence that customers are sequencing on PacBio more than ever. Finally, service and other revenue grew to $4.4 million in the third quarter compared to $4.1 million in the prior quarter and $3.4 million in the third quarter of 2020.

Our service revenue growth reflects the growing install basis of Sequel II and IIe. Shifting to a regional view, Americas revenue of $19.4 million more than doubled from the third quarter of last year. Of note, in the third quarter, we installed the first Sequel II unit in South America.

Moving to Asia-Pacific, revenue of $9.2 million grew 58% year-over-year and marked the fifth straight quarter of consumable revenue growth, representing the increasing installed base and continued improvement in utilization since the start of the pandemic.

Finally, EMEA revenue of $6.3 million was up 46% compared to the prior year and roughly flat on a sequential basis.

Our commercial presence continues to expand in the region and we signed additional distributors in the third quarter, including in Spain, in the Middle East and North Africa and they have already shown tangible signs of driving new business.

As a result of our recent acquisition, starting this quarter, we will begin sharing both GAAP and non-GAAP results for gross margin, operating expenses and net income or net loss. We believe that reporting GAAP and non-GAAP measures will provide our investors with a deeper understanding of the company's operational performance.

I encourage you to review the GAAP reconciliation of these non-GAAP measures which can be found in today's release for more information. GAAP gross profit of $15.4 million in the third quarter of 2021 represented a gross margin of 44%.

Excluding fair value inventory adjustments and amortization of intangibles, third quarter 2021 non-GAAP gross profit of $15.7 million represented a gross margin of 44.9% compared to a gross profit of $13.8 million or 44.9% in the second quarter of 2021.

Benefits from higher factory utilization were partially offset by expenses we incurred as a result of continuously enhancing our manufacturing process as we drive higher volumes through our factory.

Year-over-year non-GAAP gross profit was approximately 7.9 points higher compared with 37% in the year-ago quarter, driven by the higher product volume and improved factory utilization.

Moving on, GAAP operating expenses were $89.8 million in the third quarter of 2021 which included merger-related expenses of $11.8 million and merger-related compensation expenses associated with equity acceleration in the context of the Omniome acquisition of $18.9 million.

Excluding merger-related expenses, non-GAAP operating expenses in the third quarter totaled $59.1 million, up 15% sequentially compared with $51.3 million in the second quarter and 89% higher than $31.2 million in the third quarter of the prior year.

The increase in operating expense compared to the previous quarter and last year was primarily a result of higher headcount-related spend in our R&D and commercial organizations and expenses added from acquisitions in the third quarter. In terms of headcount, we ended the quarter with 687 employees.

The increase from 492 as of June 30 was primarily due to hiring in our R&D organization as well as the acquisition of Omniome and Circulomics. As of September 30, we've also doubled our quota-carrying headcount from the start of the year with further growth expected in the fourth quarter.

GAAP operating expenses in the third quarter included a total non-cash stock-based compensation expense of $26.6 million which included $11.5 million expense related to the acceleration of certain equity awards as part of the acquisition of Omniome.

Excluding merger-related non-cash stock-based compensation, third quarter 2021 non-GAAP stock-based compensation was $15.1 million compared to $13.9 million in the prior quarter and $4.3 million in the third quarter of 2020. In Q3, we booked a discrete income tax benefit related to the acquisition of Omniome and Circulomics.

Both acquisitions were considered nontaxable acquisitions for tax purposes, therefore the acquired intangible assets do not receive a tax basis adjustment to fair value. The book-to-tax basis difference resulted in a release of a portion of the valuation allowance.

The end result was a onetime discrete non-cash income tax benefit on the GAAP P&L of $94.8 million in the quarter. Interest expense in the third quarter of $3.7 million reflects interest expense associated with our convertible notes. GAAP net income in the third quarter of 2021 was $16.5 million or $0.08 per basic and diluted share.

Excluding merger-related adjustments, non-GAAP net loss was $47.2 million and net loss per share was $0.23 compared to non-GAAP net loss of $41 million and net loss per share of $0.21 in the second quarter of 2021 and a non-GAAP net loss of $23.7 million or a net loss of $0.14 per share in the third quarter of 2020. Now, turning to our balance sheet.

We ended the third quarter with $1.0 billion in unrestricted cash and investments compared with $1.14 billion at the end of last quarter and $319 million at the end of 2020.

Inventory balances increased in the third quarter to $18.3 million, representing 4.2 inventory turns compared with $18.0 million at the end of the second quarter of 2021 which represented 3.9 inventory turns.

Accounts receivable increased in the third quarter to $23.9 million, reflecting a DSO of 58 days compared with $19.9 million at the end of the second quarter of 2021, reflecting a DSO of 49 days. Long-term deferred revenue grew approximately $8.3 million in the third quarter to a balance of $18.4 million.

The increase reflecting largely a cash received from Invitae as part of our collaboration agreement to develop an ultra-high throughput sequencer. Now moving to guidance. For the full year 2021, we are maintaining the guidance we provided on our Q2 earnings call in August.

2021 revenue is expected to grow in the range of 62% to 67% compared to 2020 which represents an annual revenue of approximately $128 million to $132 million. We had a record quarter in Q3 with Sequel II and IIe shipments at an all-time high.

As we previously discussed, quarterly revenue mix can be variable based on timing of instrument placements in a particular quarter. We still expect Sequel II and IIe installations to grow in the second half from the 79 we installed in the first half of the year. Moving down the P&L. We expect 2021 GAAP gross margin to be between 44% and 45%.

On a non-GAAP basis which excludes merger-related fair value inventory adjustments and amortization of intangible assets to be about 50 basis points higher. In the backdrop of global supply chain pressures, our team has worked diligently to procure sufficient inventory to meet customer demand for the next several quarters and beyond.

However, if there is an unexpected material disruption to our global supply chain or higher-than-expected increase in customer demand, it may become difficult to continue to ensure sufficient availability to meet customer demand, similar to others in our industry.

As a result of supply chain pressures, we are starting to incur higher prices for raw materials and components which may have an impact of 100 to 200 basis points on our gross margins over the next several quarters. For GAAP operating expenses, we expect the full year to be 263 and $267 million.

Excluding merger-related expenses of approximately $31 million in the third quarter, we expect full year non-GAAP operating expenses to be between 232 and $236 million. This is roughly $15 million higher than our previous full year guidance, largely reflecting operating expenses from Omniome.

This guidance also includes R&D expenses associated with Invitae collaboration which we expect to be approaching $20 million by the end of the year. For the full year, we expect interest expense to be approximately $13 million which reflects interest expense and amortization of debt issuance costs for our convertible notes issued earlier this year.

We expect weighted average share count for purposes of EPS for the full year to be approximately 204 million shares and 221 million shares for the fourth quarter.

The increase in weighted average share count reflects 11.2 million shares issued for our PIPE investment and 8.9 million shares issued for the acquisition consideration in the third quarter. As a reminder, please refer to our press release for a full reconciliation between GAAP and non-GAAP net loss for the nine months ended September 30, 2021.

With that, I will turn the call back to Christian.

Christian?.

Thank you, Susan. With the few months left in 2021, I am proud of all that we've been able to accomplish this year as our achievements positioned the company well for continued long-term growth.

We announced and closed the first two acquisitions in the company's history during the quarter and we're extremely pleased with the Omniome and Circulomics teams as we continue growing our company and building out our new PacBio locations in San Diego and Baltimore.

As I discussed earlier, we've performed a more detailed analysis of the markets that we serve and we're translating these learnings into sales opportunities for our expanded commercial team.

We continue to invest heavily in our long-read smart sequencing platform with a focus on improving the end-to-end workflow, dramatically increasing throughput and lowering the cost of highly accurate long-read sequencing. We are also accelerating the development of highly accurate short-read sequencing, acquired through our acquisition of Omniome.

We believe that having both long and short-read platforms in our portfolio will enable us to offer solutions to our customers that will help them resolve biology and ultimately enable the promise of genomics to better human health.

Finally, I look forward and invite you all to our Virtual User Group Meeting next week, November 9, where customers from across the globe will share how HiFi sequencing is expanding knowledge of genomes and inspiring advancements in science. And with that, I'd like to open the call for questions.

Operator?.

Now with our first question, Mr. Tycho Peterson of J.P. Morgan. Please go ahead..

Thanks. I'll start with the supply chain dynamics Susan flagged at the end. I know, you're reiterating full year guidance, so it doesn't seem like near term issues. And I think you shored up semiconductor supply ahead of some of this.

But as we look ahead are there component shortages that you have to kind of worry about, whether it's cameras or semis or otherwise and are you starting to have to work down inventory in the near term?.

Yes. Tycho, thanks for the question. I'm going to have Mark answer the bulk of it. But one of the good things about having a very strong balance sheet position is that we're able to order well, well in advance and we've done that. And so, we're generally in pretty good shape. But I'm going to ask Mark to step in and address the specifics..

Yes, Tycho. So Susan mentioned a little bit of extra costs. We have secured some extra supply to make sure that we're okay. And the one good thing about having really one really long lead time on our products is that we can plan far ahead. And so, it's actually working a little bit in our favor that we have significantly simply long lead times.

But I see it has been one of the hardest things for us to get a hold of and obviously we'll be battling the audio industry there a little bit but we feel pretty good about our supply position right now..

Yes. And I would say, we feel very, very comfortable with the near term and even the first half of next year and it's really -- we're positioning the company well for the second half of next year..

And then on the end markets, Christian, I appreciate all the incremental color that was super helpful in terms of your customer segments.

Are you able to give us a sense for HiFi penetration, what percentage of your customers are using the HiFi reads today? Are some of these things like the NVIDIA and Google Enhancement is going to be rolled out commercially? And what's interesting on the new applications front? You mentioned there are a handful of new ones coming..

Yes. A lot to unpack there but the -- in terms of people using HiFi, we're seeing more and more adoption people moving away from traditional sequencing to Hi-Fi getting -- in fact, I think all of our applications now are HiFi-enabled. And so, folks are starting to move that way. I suspect that will be the predominant way people continue to go forward.

With respect to kind of some of the informatics advancements, we fully intend to make as much of that clinic or commercially available as we can.

It really will -- it takes a bit of time because you have to think through the compute that people have in their labs already and make sure that the algorithms are capable of being completed in kind of the standard customer labs.

But clearly, high throughput customers, customers with large IT infrastructures already will be able to take advantage of these advancements. And I think that's really important when we look down the road, we talked about the end-to-end workflow.

And today, in my section, I talked a lot about sample prep in how we're making really great progress there with the launch of our first kits. But it is also continuing to improve the back end, the raw read accuracy continues to improve. And that just gives us more opportunities and applications. And you asked about the emerging applications.

We've seen some really, really great progress in AAV with some customers. So I think gene therapy, CRISPR, kind of those emerging areas I talked about in my section, synthetic biology is a very powerful area for us. And then, finally, it can't be underestimated this MAS-ISO-seq paper that came out from the Broad.

That enables isoform sequencing in RNA in a whole new paradigm that short reads can't get access to. And we can do it at a scale now that makes it very competitive and very compelling.

And so, I think, I would look for us to be developing core kits around that, making those applications simple, easy to use, so customers around the world can get access to it. But as I've said in the past, the more we drive our installed base, the more these new applications are going to emerge.

And we've seen this happen before in our past where as you drive in deeper into the installed base and build that installed base, new applications emerge from maybe places you weren't thinking and create very significant business opportunities. And we're at the very beginning of that opportunity which is pretty cool..

Great. Two quick ones before I hop off on Omniome and then also NPK clinical whole genome sequencer.

Are there milestones over the next year that you would point us to that we should be paying attention to on the development path? And then, speaking of next year, are you willing to make any comments on '22 at this point? I think the Street's guiding at about $188 million..

Yes. Simple one on guidance for '22. I think our business is continuing to grow. I think we're positioned really well to keep growing but I won't give specifics until we get there. But I do think that one of my objectives is to keep growing every single quarter and keep pushing -- driving, delighting our customers with great products.

And so, I'm excited about '22. If you talk about Omniome and the road to getting that product launch, I think the first thing you'll see is you'll start to see some data come out using our new amplification method -- and that new amplification method. So just to take it back a notch, Omniome had fully developed in EPCR front end.

In fact, they went through a beta test this past quarter and it was very successful actually. But the problem with that front-end is that to where we want to go with ultra-high throughput and fully scaled capabilities, we needed to develop a new front end.

That front end is already deep in development and I would expect to see data coming out -- the sequencing data with that front end. And then, I would see -- I would expect to see big conversations about beta tests and early access and things like that before we get the full launch in '23.

And my expectation is when we say full launch, we mean global launch anywhere in the world with our fully developed commercialization capability which I think will give us a really powerful platform to get this great technology to market. You know what, Mark was going to cover Invitae. Sorry, I missed..

You asked for some key milestones. So obviously, on the Omniome front, we do look for some more demonstrated data generation next year. Invitae, we actually have our quarterly Joint Steering Committee with them next week.

We're making great progress on all of the concepts around that and we've aligned on all the preliminary assumptions and all the designed input, actually looking to exit our concept phase by the end of next week once we get through that meeting. So really encouraged with the way the teams are working together.

And we've kicked off some new working groups with Invitae. So we've got a whole sequencing work to our group.

We've got a front-end sample prep, where they have amazing automation expertise and then another team working on the compute infrastructure because you can imagine, you see that many genomes is going to require a lot of compute power on the back end but really remain encouraged with the engagement and looking forward to the meeting with them next week..

Yes. And I think to take that development parlance, that Mark was talking about, what it means is that the project is still right on track.

It's where we would expect it to be at this point which as we exit concept into the feasibility and then development phases of a program, we will be able to start demonstrating data, demonstrating working units and really prepare ourselves for launch in accordance with the timeline we've outlined.

We haven't really publicly talked about it but we're right on track..

And for our next question, Kyle Mikson of Canaccord Genuity. Please go ahead..

Hey guys, thank you taking my question. Congrats on the quarter and Prenetics and the sales team, great updates.

I want to start with the kind of like your thoughts on the competitive landscape in long-read, how that's evolving? Your main long-read competitors are pretty busy with some publications of their own highlighting things like using short-read libraries for long-read sequencing, among other things and it's also obviously kind of public outside the U.S.

So I guess, are you noticing any change in the competitive landscape of the environment or any changes in types of requests from customers, especially internationally, maybe in Europe or in Asia?.

Yes, Kyle, thank you for the question and thank you for the comments on the quarter.

With respect to our competition in long-reads, it's interesting because as we learn more about where they're driving their revenue and we're driving our revenue, we actually don't overlap very much because in competitive situations, we continue to see that we end up coming out on top.

And I think that's because as a clinically focused human sequencing company, our systems are highly reliable. They give you the answers that you want, et cetera. And I think that's one of the reasons why we continue to grow, they're continuing to grow.

Outside of the United States, we're building the commercial infrastructure now so we could reach all those customers and we're making great progress in China, great progress in Europe and quite frankly, in Japan and Korea and the rest of APAC.

And so from my perspective, I'm really excited about our prospects and I don't think we're slowed down from a competitive dynamic very much at all. However, I respect -- I actually think it's great to have competition in the market because it gives -- it pushes us hard.

We're competitive people and we want to just give customers the solutions that they need. And so I think on balance, we're respectful of our competition but I don't think it's slowing down our growth, quite frankly, one iota..

Okay. Yes. I appreciate that, Christian. That was really helpful. I agree the more the merrier I guess in long-read. I wanted to turn to Omniome. I believe that there were plans to possibly submit or announce some publications with Omniome maybe in 2022.

I guess is that still the plan or is that a plan? And I know this was touched on in the last line of questioning but I guess, how was the kind of adjustments to the amplification method going with Omniome? And have you seen any encouraging data thus far that -- I guess it sounds like you'll launch in the first half of '23 which is encouraging but anything tangible that you've seen so far that really makes you kind of excited?.

Yes. I mean, we're seeing great data every day to be -- I mean I'm not even -- I'm not overstating that one bit. I think the team has done an amazing job. We're really close to commercial specs on what we want to launch with, with the clustering that we're working on. And we're plugging that right into the sequencing workflow.

The sequencer is taking that data and working really well generating exactly what we would expect, probably a little bit ahead of our schedule quite frankly but we are seeing the first half of '23. In '22, you'll clearly see -- you'll see opportunities for us to present data.

Hopefully, our peer-reviewed publications, that everyone can get their arms around and understand how powerful this accuracy really is and show how the densities of which we'll be able to operate which will allow you to give hundreds and hundreds of millions of reads per run which will make it competitive with other counting-type technologies in the market.

And so we're very encouraged about what we're seeing. And we're also -- I talked about this in my prepared remarks and I'm a bit -- I'm pleasantly surprised at how much technical synergy there is between the teams and how aggressively the teams have already been trying to leverage that.

As you know, the fact that single molecule sequencing technology gives us very powerful core competencies in entomology and dye chemistry and things like that, surface chemistry.

But also in the informatics and simplifying the compute workflow which if we can solve the problem -- challenges we have with SMRT sequencing, moving that -- moving a lot of those ideas to SBB will make that development go faster and also probably provide higher quality results than if Omniome would have been standalone.

So on every level right now, we are seeing the integration is going well, the product development is proper product development. The beta tests I talked about on the prior using the EPCR method went really well.

And why that's important is it shows the sequencing capability as well as the instrument performance gives you a lot of indications on how well the instrument is going to work. We're doing some redesign to the instrument but not significant, it's not a ground-up redesign or anything.

But we'll make it more powerful, more user-friendly and more capable to really go get into the market and build that beachhead, as I talked about when we closed the acquisition..

The only other thing I'll add, Kyle and really impressed with the technological shift with EPCR. I'm also really encouraged by the conversation we're having with people that want to explore what applications is higher read accuracy will benefit.

And so some really good external conversations about access to some sample types to really go and start to explore Q40 probably it's accuracy..

I mean as you know, Mark runs our Corporate Development Group in addition to his day job and has really been taking the charge, leaving a lot of very important conversations around the Omniome technology which bodes well for the future of the technology..

Perfect. I appreciate all that color guys. I think it's awesome. Let me just ask one quick one before I hop off, about COVID. I'm sure you saw the same trends but the COVID sequencing data news published from CDC really stepped up in the summer months.

I was wondering if you could break out if that was a material portion of revenue during the third quarter? And then related to that, I guess, it's exciting to see cumulative solutions is going to be launched in the fourth quarter, I guess, as expected.

Maybe, Mark, could you just walk through just one more time why that's so meaningful compared to your kind of current ability to do the surveillance testing?.

The new HiFiViral?.

Yes.

Maybe start with that, why HiFiViral, why we're so excited about it?.

I'm going to let Susan move on to some of the COVID revenues. But a couple of things that this is important for us to prove. First, to prove ourselves that we could kit a product. And so this is really our first end-to-end workflow with library perhaps three sequencing kits and with the back-end informatics.

And developing those capabilities was an important thing for us to do. But what I really like about this new product is we've moved now to doing enrichment with molecular inversion probes and which dramatically improves the workflow in the hands-on time.

And so if you compare that to ARTIC PCR approaches or other approaches that are on market, you're going to start to see this really seamlessly plug into existing automation and laboratory technicians just embrace this. And so we really want to make sure that we're going to create a differentiated product from a workflow perspective.

I mean also from the way we've been able to tile across the virus, we're unlikely to suffer from dropouts. And so, discovery of new variance is going to be really important as those continue to emerge.

So we do feel that we've created not just a workflow for the first time but a really good workflow that's going to benefit laboratories around the world. And how the data quality that I think is representative of PacBio which we're trying to build as an organization..

Kyle, in terms of revenue volume, we've talked about it kind of in sort of the single-digit millions of revenue and we're continuing to kind of maintain that revenue level. We're expanding the number of customers we're supporting for COVID surveillance.

And of course, we're super excited by the HiFiViral product that's going to be released this quarter. So continuing -- but for us, it's all about introducing that fully kitted product and then getting that out into the market, so that we can expand to more customers..

Yes. The challenge Kyle, we get such a small fraction of each sample in terms of dollars because we don't have a kitted solution. And so albeit more samples are being sequenced and our revenue -- but our revenue is still kind of hovering in the few million dollars a quarter.

So I wouldn't say it was a significant contributor to the overperformance of the quarter. It was really the core business and it was the core. And it was also significant onetime multisystem orders. Our multisystem order volume dances in doubts in the same place from quarter-to-quarter.

So it's really the expansion of the sales force, driving those individual instrument orders in the new territories, particularly in Americas as we split territories and those territory splits are giving us the opportunity to actually talk to more customers and with our -- us generally raising our profile some.

I think that's driving our sales funnel and our sales funnel is healthier than it's ever been..

Great. Thanks for the details, everyone..

And for our next question from Tejas Savant of Morgan Stanley..

Hey guys, good evening. I just wanted to go back to the instrument guidance, Susan. I think you mentioned doing more than 79 units in the second half of the year. And by my math, that sort of suggests about 35 units as a floor for the fourth quarter. That's a pretty big sequential step-down and I'm sure there's upside to that number.

But I'm just curious whether you expect to exceed 44 or did you have any pull forward that we should be thinking about in the third quarter here?.

Yes. So I'm going to take that one. And the reality is that we did not have much pull forward from the fourth quarter. The business continues to grow but we continue to say that the instrument number will be variable from quarter-to-quarter, as you've seen in each of the three quarters of this year so far.

You're right, that range might be more variable than what we've seen in the last few quarters and therefore, might be a little too wide. But at this point, we are planning to grow every single quarter and very focused on serving our customers, making sure that we drive instrument placements and preparing our customers for '22 as well.

So there's a lot of factors involved. And I think what Susan said is more than 79, so I think you can take it at that..

Got it, okay.

And Christian, what are you expecting around the year-end budget flush on that sort of related note here?.

That's a good question. And it's always -- it's still quite -- we're early enough in the quarter where we don't know that answer yet. We have had good quarters in the past. My first full quarter last year in Q4, there was -- we had a very strong quarter because of some budget flush issues. I guess that's not an issue but budget flush opportunities.

And who knows, we are being thoughtful about not getting too far over our skis and just continuing to focus on the base business. And if incremental orders come in, we're prepared to supply them.

Mark's team has done a great job of getting the supply chain and the manufacturing organization ready to support a whole range of outcomes which I think is quite exciting..

Got it. And then one on the commercial expansion here. You said you doubled your quota-carrying sales team a quarter ahead of plan and you plan to grow further in the fourth quarter.

Do you have a new target in mind relative to the '22 reps you had as of year-end 2020? And then any color that you can share in terms of the new rep productivity here?.

Yes. So the new -- I'll start with the productivity question. I think the one thing we found and I said that -- I think I talked about this on our last call, is that reps that are going into greenfield territories are taking longer to get ramped up then say, our historical norm.

And so they perhaps are taking as much as the three quarters, three -- six to nine months to get going. Reps that are going in where we're split a territory and there's already some funnel building are probably on the order of six months. Outside the United States, it's actually much more variable because those territories, you have funding.

Funding is a much bigger obstacle in the sense of getting through potential tender processes and just lower levels of funding relative to the U.S. in general. But I think on balance, six to nine months is appropriate in what we're seeing.

I do think and I've said this in our prepared remarks that we are seeing the benefit of expanding our commercial organization because -- and you can tell because you could see how strong Americas was, for example and you're seeing much more single-unit orders than we've ever had before which means we're just reaching more customers.

And we're -- and people are excited about the Sequel IIe and the value proposition there. They're seeing the advances we're making on the front-end and the back-end. And so the overall value proposition is becoming more compelling.

When I think out into '22, I think we need to continue growing our sales force and I think the focus will be principally in Europe but it will also -- Europe will be a core expansion into Asia-Pacific. So expanding some in Japan, definitely in Australia, Korea. I think those are opportunities. I think there's huge opportunities for us in China.

It's likely we'll figure out how to put some more leadership into China so that we can have a much more aggressive effort in that area and expand the end of customers quite a bit. And so that will be a big push in '22 when you think about sales reps. Do we double the sales reps from here? I don't know.

We'll wait to see what the budget tells us in a few weeks as we wrap it up. But I wouldn't be surprised that we have to make sure we're reaching as many customers as possible..

Got it. And then one final one on China from me, Christian, that's obviously a major geography for you.

Can you give us some color there on what you're seeing in terms of the order book and pull through? And how do you see those trends evolving post-NMPA approval here?.

Yes. I think it's too early to say post-approval. I think we'll wait and see and talk to Barry. That's pretty fresh news. But I think in China, we're seeing the business continue to be strong. Hopefully, it continues to be decent..

It still continues to be strong, improving since COVID every quarter..

It continues to improve. And so I think we're really bullish on China. I think there's macro factors that are completely outside of our control between the U.S. and China that maybe I start to lose sleep over a little bit but they're completely out of our control.

But based on what we control and what we can see and what customers are actually doing with our technology, we're quite encouraged and we think the opportunity is still in front of us, quite frankly..

Got it. Very helpful. Thanks, guys..

And for the next question, Dan Brennan of Cowen. Please go ahead sir..

Great, thanks for taking my question. Maybe just, Christian, you alluded to it a couple of times during the call but just on the funnel itself, I don't know in the past kind of look on a clarity you provide on it.

But just could you give a sense of what the funnel looks like today maybe like customer segment and kind of how it's evolved over the course of 2021?.

Yes. First of all, Dan, congrats on your new role. We're going to miss Doug but it's good to have you on the ball club. With respect to the funnel itself, let's state that we haven't given a lot of color and I don't think we will give a lot of color because those processes internally are evolving and are being built and improving all the time.

We've spent a ton of time this year defining the funnel more, creating a common language from which the sales force can communicate with each other and with executives so that we get much better about forecast accuracy, so that we can stand up in front of you and give you what we hope to be pretty reliable projections.

One of the things we talked about for the first time, kind of some of the segment, market areas that we're focused on and our relative revenues. The reality is that the company didn't have any of those capabilities and we had to come in and build that.

And so at this time, I really -- it's probably not appropriate for me to give you more color on the specific funnel other than the general comment that often use.

This -- the increasing commercial footprint is directly impacting the quality and the size of the funnel which does give us generally better visibility into the future than perhaps we've had in the past.

But at any given quarter, since instruments are still such a significant part of our quarterly revenues and they're quite binary because they're large dollar numbers, they could have an impact on any given quarter.

But if you look out over time, we're very encouraged what we see in the funnel that there is very strong demand for these products and platforms; this will help us grow. As we grow, we will be able to improve our gross margins.

As we improve our gross margins, we'll be able to get better leverage across the business and make that push towards ultimately getting to cash flow breakeven and better..

Great, that was helpful. Maybe just a high-level one on kind of academic funding. Obviously, it seems to be pretty robust from the headline figures and entering '22.

Is that something -- clearly you've got a lot of growth levers at your disposal which you've discussed but is that something on top that you're seeing at all or your salespeople are seeing an impact on that? Just kind of wondering how that translates maybe into the growth that we're going to see over the next 12 to 24 months?.

It's interesting, right, because back in the day, academic used to be -- we all both used to rise and fall with academic and we're much more balanced today with academic and translational research and even customers like Invitae, pushing their products.

But we do see the academic funding environment as being reasonably strong at this point and a good -- providing us with a good opportunity set. I think Americas are continuing to lead the way there.

EMEA, there is pretty reasonable amounts of funding but it is harder to get to and our footprint is still a bit too small and we need to build on that pretty aggressively. But on balance, yes, I think the academic market is in good shape right now.

But the beautiful thing for us is we talked about, for example, Children's Mercy of Kansas City, they've already sequenced over 600 genomes and are continuing to grow and expand.

And accounts like that, where they really are showing the power of long-read sequencing are very, very critical to our success as a company and we're seeing them thrive which is great..

And we no longer have questions on the queue. At this point, I would like to turn back the call over to Mr. Todd Friedman for some closing remarks..

Thank you all for joining us today. As a reminder, a replay of this call will be available on our website in the Investor Relations section as well as through the dial-in instructions contained in today's earnings release. This concludes our call and we look forward to updating you on our progress in the fourth quarter..

And this concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect. Thank you, all..