Good day, and thank you for standing by. Welcome to the Pacific Biosciences of California, Inc. Fourth Quarter 2021 Earnings Conference Call. . I would now like to hand the conference over to your host today, Todd Friedman, Director of Investor Relations. Please go ahead..

Good afternoon, and welcome to PacBio's Fourth Quarter and Full Year 2021 Earnings Conference Call.

Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available in the Investors section of our website at www.pacb.com, or is 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 statements regarding predictions, estimates, plans, expectations, guidance expectations for, including advantages in connection with new products, technology and software development and launches, and the anticipated timing of such development and launches, expectations with respect to our products, expectations resulting from the continued building of the HiFi ecosystem, expectations with respect to our partnerships and collaborations and other information.

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

We disclaim any obligation to update or revise these forward-looking statements. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S.

GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans and to benchmark our performance externally against peers. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release.

In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of our 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. In 2021, PacBio underwent a remarkable transformation. And before we get started with our prepared remarks, I'd like to recognize and thank all of our employees. For they are the ones that have executed our strategic vision to make that transformation possible. Thank you. Thank you.

Thank you. On today's call, I will start with a brief update on our fourth quarter performance. Next, I will discuss how we executed on our strategy in 2021 to help build the foundation for long-term growth. I'll also spend a few minutes outlining our strategic priorities for 2022.

Then I'll pass the call to Susan to discuss our financial results in more detail and walk through our full year guidance. The fourth quarter marked the close of PacBio's most transformative year in its history.

In the fourth quarter, we achieved record quarterly revenue of $36 million, a 33% increase compared to the fourth quarter of 2020 and our seventh consecutive quarter of sequential growth. Q4 also wrapped up PacBio's most successful year with full year revenue of $130.5 million or 65% growth from 2020.

Driving our record annual performance is the increased adoption of the Sequel II and IIe platforms. Not only did we nearly double our installed base in 2021, customers from around the world are using the systems more than ever before, generating the most accurate and complete sequencing data on the market.

In the fourth quarter, we installed 48 systems, which is also an all-time quarterly high and brings our total installed base to 374 units, an 84% increase compared to the end of 2020. What is encouraging is that over half of the system orders in the fourth quarter were from new PacBio customers.

This was the most orders from new customers that we've seen since the launch of the Sequel II nearly 3 years ago. Many of our shareholders have asked me how we'll know that our investments in our commercial infrastructure are paying off.

So I thought I'd give you a little detail to illustrate how the expanded commercial organization is beginning to make a difference. Over the course of the year, we've been able to accelerate the number of new instrument orders received and recognized as revenue within a quarter. This metric is known as instrument turns.

For example, in the first quarter, approximately half our new system placements were from orders turned in that quarter. By the fourth quarter, nearly 90% of our instruments were turned within the quarter. This demonstrates that we're reaching more customers and converting their interest into sales faster than ever before.

This example, along with the fact that a sizable portion of our new instruments placed in Q4 were to new customers, shows that our strategy to increase our global commercial footprint is beginning to drive demand across all of our markets. Also encouraging is that over half of our new instrument customers are focused on human germline sequencing.

For example, Cincinnati Children's Hospital purchased its first PacBio system in the fourth quarter, and is expected to use the platform in a broad spectrum of human research applications. One of our strategic priorities in 2021 was to demonstrate the utility of HiFi sequencing in clinical whole-genome applications.

Let me share a few of the recent highlights on how we've progressed on this goal. During 2021, we initiated collaborations with top-tier institutions like Rady's Children's Institute for Genomic Medicine and Children's Mercy Hospital, Kansas City.

As a result of our collaborations, both institutions have shared compelling data, highlighting the benefits of long-read HiFi sequencing.

These collaborations are extremely important as they can show the potential of long-read HiFi sequencing technology to identify variance in areas of the genome that are difficult to sequence with short-read sequencing technologies and ultimately, increase the diagnostic yield for rare disease cases.

We believe that these successful collaborations will drive an inflection point in growth and adoption when we launch higher throughput systems. And in the fourth quarter, we further expanded our collaborations.

ARUP Laboratories, for example, will explore the use of HiFi whole genome sequencing as part of the Utah NeoSeq Project, which is a project that aims to provide genetic diagnosis for patients in the neonatal intensive care unit.

Similarly, with UCLA Health, researchers will investigate the effect of diagnostic yield on unresolved cases by combining full-length isoform sequencing and long-read whole genome sequencing on PacBio instruments. Programs like these are progressing not just in the U.S., but all across the globe.

The Care4Rare Canada Consortium will reflect negative short-read sequencing tests with PacBio long-read whole genome sequencing. In Qatar, we delivered 2 additional Sequel IIes to Sidra, where they've been leveraging HiFi whole-genomes to better understand rare disease.

In the Netherlands, we delivered 2 more systems to Radboud University Medical Center, enabling them to further scale HiFi sequencing for programs like the SOLVE-RD European research program.

Radboud has been using PacBio sequencing for several years, and to paraphrase one of the researchers at the institute, the HiFi genome trios that have completed with PacBio technology to date, are likely the most comprehensive they've ever had.

And the value of HiFi genomes in unraveling disease-causing, previously hidden structural variants is becoming apparent now. Another exciting program is our pilot study with Genomics England.

As you may know, Genomics England completed a project with sequenced over 100,000 whole-genomes using short-read technology, most of which from patients affected by rare diseases or cancer. While this program helped deliver actionable findings to many families, roughly 75% of the rare disease cases are still unsolved.

Our pilot study will sequence samples from a subset of these unsolved cases, and our lab has already received the first batch of samples. We are hopeful that additional insight gain during the study may ultimately lead to new therapeutic or clinical trial options for patients with rare disease.

Our goal is to demonstrate the power of HiFi sequencing to help these families find the answers. Another strategic priority for the company in '21 was to both expand and accelerate our product development pipeline.

By expanding and accelerating our product development programs, we intend to offer multiple sequencing platforms to the market, so our customers will have the ability to leverage our technologies at price points and throughput levels that fit their research needs.

From our multiyear high throughput development collaboration with Invitae to our acquisitions of Circulomics and Omniome and our recently announced desktop sequencer partnership with Berry Genomics, we have transformed PacBio from a single product-focused company to an organization poised to deliver multiple platforms and core technologies that reach all ends of the sequencing market.

But our focus hasn't solely been on new sequencing platforms, we are also very focused on developing end-to-end solutions for our customers. For example, in mid-November, we launched our first fully kitted solution, HiFiViral, which was conceived, developed and commercialized all within 2021.

This new kit provides Sequel II and IIe customers everything they need to sequence the SARS CoV-2 virus. The HiFiViral Kit provides what we believe to be the most comprehensive view of the SARS-CoV-2 genome on the market today and due to its unique design, the Kit can detect emerging variants without the need for a kit redesign.

With just 1.5 months of sales in the fourth quarter, we've shipped the Kit to 20 global customers, and it was a key driver behind the placement of a handful of Sequel IIes to public health labs during the quarter.

We see continued investment -- continued instrument demand from research customers, particularly public health labs interested in HiFiViral and expect this to help lay the foundation for future Kit development.

Moving on to 2022, you can expect PacBio to continue building the ecosystem around HiFi sequencing, which we will anticipate will result in the availability of a diverse set of applications focused on the customer.

We are working with organizations like the Broad Institute to bring its single cell Iso-Seq method to more PacBio users and with Twist Bioscience to develop kits around HiFi sequencing in areas like pharmacogenomics and targeted panels that explore the dark regions of the genome.

As HiFiViral drove incremental Sequel IIe sales in Q4, a robust ecosystem offering application-specific kits will be an essential driver of our future growth. Last April, we released our Version 10.1 sequencing kits that drastically improved performance, speed and throughput on the Sequel IIe.

It approved the polymerase, allowing for more sub reads, increased HiFi data and cut DNA input requirements by threefold, opening up more sample types to HiFi sequencing. This April, we plan to launch another update to our library prep and sequencing kits for the Sequel II and IIe platforms.

These kits will cut the upfront workflow time nearly in half, require customers to order and store fewer materials and lower DNA input requirements even further. We remain committed to streamlining our long-read sequencing workflows, shortening time to answer and enabling our platforms to sequence more sample types.

In fact, with the new sequencing kits, we anticipate that DNA input requirements for whole genome sequencing will be decreased five-fold relative to what it was just 1 year ago to just 1 microgram per SMRT Cell in human whole-genome applications.

We're also working with Google Health to co-develop deep learning methods based on their deep consensus algorithms to improve our route-based accuracy. With small improvements to our raw read accuracy, we can shorten our run times, increase our throughput and allow for even greater consensus accuracy.

But perhaps what I'm most excited about in the near term, though, is the launch of our upgraded software plan for this April that will equip every Sequel IIe system with on instrument methylation detection with no additional cost or workflow steps.

I'd like to take a minute to discuss methylation and why this new feature of the Sequel II and IIe platforms is poised to provide our customers with even more complete information on every sample sequenced, potentially unlocking greater biological discoveries.

As many of you know, epigenetic changes are factors beyond the floor-based DNA sequence that can change the way genes are expressed. Methylation is one example of an epigenetic change. It involves changing the chemical structure of a DNA base by adding a set of atoms called the methyl group.

Methylation associated with silencing DNA can also potentially alter gene expression. Over the past several years, our understanding of methylation and its implication on human disease has grown substantially.

For example, scientists are discovering that methylation patterns may play a fundamental role in the development of a large and diverse number of human cancers. Because of this, we believe methylation sequencing should be a critical component to genomics and biological research.

It's an area ripe for more discovery and with the development of a better detection technology. Detecting both methylation and DNA sequence on certain other platforms requires cumbersome workflows and multiple sequencing runs. As a result, epigenome sequencing has been applied at a much smaller scale than genome sequencing on other platforms.

With our software release, we believe PacBio will be the only instrument provider at present that can offer simultaneous detection of both DNA sequence and methylation signatures with no changes to sample prep sequencing performance and at no additional cost or workflow steps.

Using this feature in early access, researchers at Children's Mercy, Kansas City reported to us that they uncovered both a long repeat expansion and the hypermethylation in the DMPK gene from the sample of an individual diagnosed with the type of muscular dystrophy.

Further, the team believed that directly and accurately connecting genetics and epigenetics with the same HiFi workflow could have significant near-term applicability in medical genomics. So let's move to our short-read sequencing by binding platform acquired through our acquisition of Omniome in Q3. Our product development program is on track.

As we shared last month, we've successfully implemented a new clustering method that has enabled higher density, easier workflows and even improved overall performance and accuracy. We are now consistently observing exquisite accuracy on our alpha systems with over 90% of the reads at Q40 levels or above or 1 error in every 10,000 basis.

We believe that this is more than -- 10x more accurate than other sequencer specifications that have been announced to the market. The team is working diligently to incorporate these advancements into beta systems that we expect will output greater than 120 gigabases per flow cell.

We expect these beta systems to be in customer hands in the second half of this year and launch globally in the first half of next year. Now turning to organizational updates. The integration of Circulomics and Omniome is progressing nicely. We now have a growing R&D presence in San Diego and on the East Coast of Baltimore.

Our sales force can now also directly sell our Nanobind extraction kits to all of our customers around the world. We have also completed our leadership -- commercial leadership build-out with the addition of Lara Toerien as General Manager of the Americas and Jason Kang as General Manager of Asia Pacific.

We've also appointed Chris Seipert, a PacBio veteran, to lead a new function focused on customer experience. I'm thrilled to have these leaders in our organization as they have deep customer relationships and decades of experience building successful sales and support teams.

With that, I'll now turn the call over to Susan to discuss our financial results.

Susan?.

Thank you, Christian. As discussed, we are pleased to report another record revenue quarter in the fourth quarter of 2021 with $36 million in product and service revenue, which represented an increase of 3% from $34.9 million in the third quarter of 2021 and an increase of 33% from $27.1 million in the fourth quarter of 2020.

Instrument revenue in the fourth quarter was $16.2 million, an increase of 2% sequentially from $15.9 million in the third quarter and a 19% increase from $13.6 million recorded in the prior year quarter. We delivered 48 Sequel II and IIe systems during the fourth quarter, growing the install base to 374 systems as of December 31.

Turning to consumables. Revenue of $15 million in the fourth quarter grew 3% sequentially from $14.6 million in the prior quarter and was up 49% from $10.0 million in the fourth quarter of last year.

Sequel II and IIe consumables represented approximately 82% of our total consumable shipments in the fourth quarter with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and IIe installed base in the fourth quarter was approximately $150,000.

As a reminder, pull-through per instrument is calculated by dividing our quarterly consumable revenue by the Sequel II and IIe install base at the beginning of the period. Additionally, pull-through figures include HiFiViral, but exclude Nanobind extraction kits.

In Q4, we observed strong utilization across the install base of Sequel II and IIes, and the sequential decline in annualized pull-through in Q4 was largely due to record number of installs we observed in Q3 as well as some consumable warranty-related replacements we made in Q4.

Finally, service and other revenue grew to $4.8 million in the fourth quarter compared to $4.4 million in the prior quarter and $3.5 million in the fourth quarter of 2020. Our service revenue growth reflects the growing install base of Sequel II and IIe.

Shifting to a revenue, a regional view, Americas revenue of $18.7 million in Q4 grew 54% compared to the fourth quarter of 2020, with a record number of instruments shipped in the quarter.

Moving to Asia Pacific, revenue of $8.3 million reflected 5% growth over the prior year period, largely due to the strength from multi-instrument orders from multiple customers in the fourth quarter of 2020.

A particular note, Japan had strong performance in the fourth quarter of 2021 that included a Sequel IIe shipment to The University of The Ryukyus, which will use HiFi in its pilot pan-genome project. This pilot may potentially open up a broader program looking at genomic diversity within Japan.

Finally, EMEA revenue of $9.2 million was an all-time high for the region, with revenue growing 29% year-over-year and 44% sequentially.

The strength in the fourth quarter was attributable to both multi-instrument orders, such as the Sequel IIe shipped to Radboud, in support of the SOLVE-RD research program as well as multiple instruments placed with new customers. We also added our first commercial service provider in the region, Gene Support.

This highlights the growing demand for HiFi sequencing in the region and the Switzerland-based company is already marketing a catalog of HiFi sequencing offerings to scientists and researchers across Europe.

From a segment market perspective, for the full year 2021, human germline applications represented approximately 1/3 of our business and was the fastest-growing application. Our next largest market was plant and animal, about 30% of billings, followed by infectious disease and microbiology at over 20%.

The remaining comes from oncology and emerging applications. Moving down the P&L. As a reminder, starting last quarter, we began sharing both GAAP and non-GAAP results for gross margin, operating expenses and net income or net loss.

I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release for more information. GAAP gross profit of $16.8 million in the fourth quarter of 2021, represented a gross margin of 46.5%.

Excluding amortization of intangible assets, fourth quarter 2021 non-GAAP gross profit of $16.9 million represented a gross margin of 47.1% compared to non-GAAP gross profit of $15.7 million or 44.9% in the third quarter of 2021. Moving on.

GAAP operating expenses were $81.4 million in the fourth quarter of 2021, which included $1.6 million expense from contingent consideration remeasurement, merger-related expenses and amortization of acquired intangibles.

Excluding these expenses, non-GAAP operating expenses in the fourth quarter totaled $79.9 million, up 35% compared with $59.1 million in the third quarter and 126% higher than $35.4 million in the fourth quarter of the prior year.

The increase in operating expense compared to the previous quarter and last year was primarily a result of higher headcount-related spend in our R&D and commercial organizations and a full quarter of expense associated with Omniome operations. In terms of headcount, we ended the quarter with 728 employees, compared to 412 at the end of 2020.

GAAP and non-GAAP operating expenses in the fourth quarter included a total non-cash stock-based compensation of $17.5 million, compared to non-GAAP stock-based compensation of $15.1 million in the third quarter of 2021 and $4.8 million in the fourth quarter of 2020. GAAP net loss in the fourth quarter of 2021 was $69.3 million or $0.31 per share.

Excluding income tax impact resulting from acquisitions, change in fair value contingent consideration, merger-related expenses and amortization of intangible assets, non-GAAP net loss was $66.4 million and non-GAAP net loss per share was $0.30 compared to a non-GAAP net loss of $47.2 million and non-GAAP net loss per share of $0.23 in the third quarter of 2021, and a non-GAAP net loss of $23.1 million or non-GAAP net loss of $0.12 per share in the fourth quarter of 2020.

Now turning to our balance sheet. We ended the fourth quarter with $1.04 billion in unrestricted cash and investments, compared with $1.08 billion at the end of last quarter and $319 million at the end of 2020.

Inventory balances increased in the fourth quarter to $24.6 million, representing 3.6 inventory turns compared with $18.3 million at the end of the third quarter of 2021, representing 4.2 inventory turns.

Accounts receivable increased in the fourth quarter to $24.2 million, reflecting a DSO of 62 days, compared with $23.9 million at the end of the third quarter of 2021, reflecting a DSO of 58 days. Long-term deferred revenue grew approximately $6.6 million in the fourth quarter to a balance of $25 million.

The increase largely reflected the cash received from Invitae as part of our collaboration agreement to develop an ultra-high throughput sequencer. Now moving to guidance. For the full year 2022, we expect revenue in the range of $160 million to $170 million, representing a growth rate of approximately 23% to 30%, compared to 2021.

In January, we began to see lower utilization largely due to the impact of COVID-19 and associated quarantine slowing lab productivity and, in some instances, preventing lab access. Additionally, COVID-19, coupled with the recent macro environment has resulted in some potential delays in capital purchases in the first quarter, particularly in EMEA.

As a result, we expect Q1 2022 revenues to be in the range of $31 million to $34 million. At the midpoint, this represents approximately 12% growth on a year-over-year basis. Looking forward to the rest of 2022, as the impact of COVID-19 declines, we expect that global activity will accelerate and positively impact our growth.

In addition, we have also already received positive feedback from customers on the upcoming enhancements to the Sequel II/IIe platform we plan to launch in April. These enhancements, coupled with the commercial investments we have been making are expected to drive additional customer instrument orders and utilization throughout the rest of 2022.

Moving down the P&L, we expect 2022 GAAP gross margin to be between 44.5% and 46.5%. On a non-GAAP basis, which excludes the amortization of intangible assets, we expect gross margin to be about 45% to 47%, with improved leverage from higher manufacturing volumes, partially offset by higher supply chain costs.

For operating expenses, we expect the full year to be between $350 million and $360 million.

The growth year-over-year reflects a full year of expenses related to our acquisition of Omniome that closed in September of 2021, annualization of 2021 hires and an increase in R&D expenses to continue progressing on the development of our next-generation platforms.

We expect interest and other expense to be approximately $15 million for the full year, reflecting interest expense and amortization of debt issuance costs for our convertible notes issued in 2021. We expect the weighted average share count for purposes of EPS for the full year to be approximately 225 million shares.

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

Christian?.

Thank you, Susan. In summary, I'm pleased with our performance in 2021 as we executed against the strategic priorities that were set forth at the beginning of the year. First, we dramatically expanded our commercial presence. We have more than doubled the quota-carrying sales reps from the start of the year.

We onboarded a best-in-class leadership team and are completely revamped -- and completely revamped our marketing efforts and commercial operations processes to support our growth.

Second, we drove product development with multiple platforms supported by different long- and short-read chemistries across the throughput spectrum, coupled with a novel long-read DNA extraction technology and growing bioinformatic capabilities, 2021 has set the stage to bring industry-changing technology in the years to come.

And third, our long-read technology leadership in clinical whole genome sequencing, while still in its infancy, has demonstrated time and again that it has the potential to deliver life-changing results to families around the world. In 2022, we expect to achieve another year of record performance.

Our strategic focus is centered on driving product development toward the launch of both long- and short-read platforms, optimizing the productivity of our newly built commercial organization and continuing to demonstrate the power of highly accurate sequencing with our industry-leading HiFi technology.

In closing, I was happy to see the Nature technology featured fully finished genomes as 1 of its 7 technologies that look to shake up science this year. Looking back at 2021, one crucial revelation that came to the forefront of genomics world is that there are still hundreds of millions of bases missing from the human reference genome.

It was like reading a book with whole chapters missing. PacBio HiFi was a key technology for filling in those missing chapters. We're increasingly finding that sequencing genomes in native and longer stretches is unlocking more discoveries in answering more biological questions.

With our technology and development, we believe it's not if, but when HiFi sequencing becomes the de facto standard in translational research to fully characterize all classes of genetic and epigenetic variants across the complete genome from telomere-to-telomere. And with that, I'd like to open the call for questions.

Operator?.

. And our first question comes from Kyle Mikson from Canaccord Genuity..

Congrats on the quarter and the transformative year, of course. Just kind of turning to the guidance. So the '22 guide and the 1Q guide below the Street, and you referenced some things that we didn't hear from your peer last week, the lower January utilization due to COVID and some of the delays.

So I just wanted to know if you guys could kind of walk through that with a little bit more detail or kind of a refined point of clarification possibly.

Like I'm just wondering if that's mostly the smaller installed base, obviously, the commercial team is growing, the overall revenue base is kind of -- it's relatively -- it's come from a lower starting point, obviously.

And are you expecting any of these delayed placements to kind of come back later in the year? If you could kind of talk about those factors and what contributed to the kind of relatively weaker, I guess, first half and first quarter performance, that would be -- or expectation, at least, that would be really helpful..

Yes. So thanks for the question, Kyle. So there's a lot to unpack there. If we start with the consumables, we ended the year, and consumables were -- utilization was starting a bit of a downward trend, but not very significant, and we are obviously achieving record revenues.

But as we look at the results for January in all three of our primary territories, we started to see some declines in utilization with respect to consumables. And as we dove into it in early February, we noticed the conversation was that we still see COVID having a bigger impact than quite frankly, I would have expected.

But the reality is that given the fact we have such a smaller revenue base, fewer customers and more -- and customers that are more sensitive, we feel the effect of that more fully. We do believe, though, that we do -- that utilization will return to more normalized levels and continue to grow.

And as a result, that's why we gave the annual guidance of $160 million to $170 million of revenue. On the instrumentation side, what we're seeing is some of our smaller customers are being impacted by this macro environment.

In other words, the funding environment for kind of new companies and companies that perhaps maybe have gone recently public with the recent declines in volatility in the market have gotten more conservative about their spend.

And it's not that their spend is going away, but they are definitely being more thoughtful about how fast and how much scale they scale into the business. And so I think we're suffering from both of those effects.

The final thing I'd say is with respect to COVID itself, what's interesting is that our business is much more academically focused and project-based as opposed to being commercial business such as a clinical operation.

And as a result, a lot of those customers are -- have been either working for home, slowing the start of their projects in the new year while Omicron has run its course, particularly in the United States.

And so I do think that, that's having an impact on our Q1, but we are -- we do feel good that it's going to recover, and it's going to set us up for a strong year. But we -- looking at the data from the first 6 weeks of the year, we felt it was responsible to kind of put the first quarter out there and benchmark from there.

So hopefully, that helps a little bit..

Yes, that was a great, Christian. I mean it's fair -- kind of confirms what I was more or less kind of getting to with the question, some of those points there, so that was great. Just for a follow-up, kind of unrelated.

I know you guys weren't with the company at this time, but I figured I would just kind of close because we're kind of close to that -- were close to that spot basically.

I was wondering if you had any sense for the impact on PacBio in terms of new customer acquisitions or utilization when the primary linked to long-read business to left the market in like the early mid-2020 kind of time frame. And like back then, I didn't ask the question and it didn't really come up.

I mean, honestly, the company was coming off the Illumina merger, management kind of shut down these synthetic approaches over the years prior.

So I'm just curious, though, what the overlap was like, if at all, between the linked-read users and the PacBio native long-read users and at the very least because again, I understand tough given where reads past that.

It would be great if you could talk about the overlap you would expect occurred between the two technologies in terms of applications and users, if you could, that would be great..

Yes. I mean it's a tough question to answer because none of us were here back in 2020. So I don't have any real frame of reference there. But what I do have as a frame of reference, is looking at the business today and talking to several customers over the past 4 weeks or so as the linked long-read story is starting to emerge.

And what we're finding is that customers that are using our technology are clearly not interested in switching to a synthetic long-read. In other words, short-reads stitched together to make a pseudo long-read.

However, there are customers that we -- that are going to be -- that are new customers that will consider looking -- obviously, we'll look at all their options before they make buying decisions.

And the one thing that's interesting is, I think, our new -- our funnels for new customers and new customer acquisition still are larger than they've ever been in the history of the company.

And so I don't believe that, that's having a significant impact on our business today nor do I expect it to have a big impact on our business over the course of the year. So from my perspective, I don't really have an appreciation for the past.

But when I talk to customers today, most customers understand the benefits of native long-reads, they understand the power of HiFi and the completeness and the accuracy that you get when you use HiFi technology and they generally are in favor of choosing that.

So we'll obviously see what happens, but we're feeling very good about our position with respect to technology..

And our next question comes from Tejas Savant from Morgan Stanley..

Maybe I'll start with one on the guide as well, Christian, or perhaps even Susan.

I mean can you just walk us through some of the embedded assumptions here, Susan, in terms of instrument placements and how you see the consumable trends evolving from that 4Q $150,000 level?.

Yes. So maybe I'll take that one. So when we look at the kind of underlying assumptions, one of the first underlying assumptions is that there are no significant deals in the forecast, deals that would be population seat scale. Now there are several of those opportunities out in the world that we're pursuing.

And so if we achieve one of those projects, it's highly likely end up -- we end up doing it better than our guidance. But we felt it prudent at this time because those deals are, a, periodic and we don't know when they will happen that we would leave those as opportunistic upside for the company. So that's the first thing.

With respect to consumable pull-through, we do expect pull-through to come down in Q1 because we're seeing lower utilization in January. And so we would expect it to come down relative to Q4 levels. And then as COVID wanes and customers start using their systems, it's likely that it will turn the corner and head back up.

But of course, that will be somewhat mitigated or countered by the fact that we are placing a lot more instruments every quarter. And those instruments have a fairly long ramp time. And we're acquiring so many new customers that the ramp time to getting up to full speed is, in fact, longer than what we would typically see.

So if we have an existing customer where we're adding capacity, those capacity adds are pretty straightforward, and it becomes the path to increasing utilization and pull-through is limited by samples, but typically, those samples are not far away if they're buying new equipment.

If it's a new customer, you're both helping them develop their workflow and they're acquiring a customer, they're acquiring the samples they need to run an ongoing business. And so as a result, that pull-through takes longer to evolve.

And so if we look at it on balance, we do think consumable pull-through will improve, but it will be dependent on obviously the -- everyone getting back to work, so to speak, and the ratio or mix of new customers that we achieve in every quarter..

Got it. That's helpful, Christian. And then a quick follow-up on just the instrument cadence here and the uplift you're expecting in the back half of the year. So there's a couple of different dynamics that come to mind, right? You've spoken about the Sequel II improvements that you're launching in April.

I'm not sure if those include the new library prep and sequencing kits as well. But that was, I think, on track for the first half of this year as well. So you have improvements to the current portfolio.

On the other hand, presumably, you've got these -- some of these synthetic long-read approaches here from the competition potentially coming online in the back half of the year.

And it also gets you closer to your own next iteration of the Sequel, so to speak, which might sort of throw a wrench in the works in terms of a customer evaluating new purchases. So walk us through the pushes and pulls there? And what you're going to do to make sure that the market doesn't sort of freeze up a little bit ahead of those dynamics..

Well, I think the first thing we're going to do is continuing to demonstrate our commitment to improving the Sequel II platform and with the IIe and then the new improvements coming in April. We think that gives us a lot of momentum.

And if we look at our actual instrument funnels right now, even at today on February 15, they're strong or stronger than they've ever been in the history of the company.

And so it's a question of getting those customers -- basically showing the customers the improvements and why making an investment now in the Sequel II platform is a valuable investment for them and helps propel their science and how we will be with them as good partners every step of the way.

Of course, as you go deeper into the year, there's a lot of emerging priorities and competitors that are coming to market, both synthetic and new short-read competitors as well. And so customers have more choice than ever.

And I think what's going to be important for us to keep driving the instrument demand is demonstrating the power of HiFi, demonstrating the fact that now that you have a 5-day sequencer, the insights that you can get, I mean, just from the first run that Children's Mercy did, they were sending e-mails to me and our team talking about all of the great new things that they can do, which we can translate into new applications, which we can drive deeper into the market, which will accelerate and create the flywheel to create more demand.

So I think the first thing you have to do is continue to demonstrate your value proposition, and I think ours is extremely compelling right now. We have the most accurate, most comprehensive sequencer on the market. We're making it even more accurate and more useful with methylation. On the workflow side, we're simplifying workflow.

And all of these improvements are coming in April. So that gives us plenty of time to leverage these improvements to drive demand throughout the year. And so for us, we're thinking holistically about the whole workflow, sample to answer. We're thinking about core improvements to the technology itself. And all of these improvements are coming to market.

We're enabling more samples to get onto the sequencer.

Now we'll be down to 1 microgram for whole-genome applications and -- of the input DNA, which just -- it continues -- everything we're doing is opening up the market to more and more samples to drive a more compelling value proposition and to give our sales force, which is now in a really great spot the ability to kind of move more instruments.

And so I think that's where we have to focus first. Down the road, building deep customer relationships is about making sure that your customers always feel like they're getting maximum utility from their relationship with PacBio.

And so if and when new platforms start to get to market, you can be assured we'll be working with those customers in a way that makes them excited to be part of the PacBio family..

And our next question comes from Tycho Peterson from JPMorgan..

Instrument ASPs came down in the fourth quarter.

Can you comment, was that tied to public health lab placements? Or is there another dynamic going on? And how are you thinking about instrument ASPs for this year?.

Yes, Tycho, one of the drivers of that was public health labs. We did run a program so that we could help public health labs get to HiFiViral capability sooner rather than later, and that had some impact. We're also -- we are very, very focused on driving instrument placements across the -- around the world.

And so that has a mix of ASPs, whether it's multisystem deals or specific situations, say, where we're trying to drive penetration into, say, new geographies or just expand the installed base so that we get more people using long-read technology.

As we look out into 2022, I do think ASPs will be variable and they'll be dependent upon kind of some of the factors that I outlined. But I think they'll probably bounce -- they'll really bounce around depending upon the scope and nature of the deals that we do in terms of customer scaling.

So for example, if a major customer decides to do some major scaling, I suspect you'll probably see some ASP impact from that in that particular quarter.

But at the end of the day, for us right now, our focus is really driving the installed base because, obviously, that also sets the stage when new platforms come to market, you have a captive opportunity to sell into those customers..

And on Omniome, I appreciate the comment you provided, 90% of reads at Q40.

Can you talk about planned timing for getting customer data? Could we get that in the back half of the year with some of those beta placements? What's the latest thinking on price per gig? And then it did look like there was an accounting adjustment that continued consideration for just over $1 million on the fair value of in-process R&D.

Can you maybe just talk to what drove that?.

Yes. So first, let me start and pass the baton to Mark. He can talk a little bit about kind of some of the timing associated with Omniome because he's -- it's -- he owns that project. I guess I own all the projects ultimately, but -- and then maybe Susan can address the in-process R&D. It's pretty simple.

So Mark, do you want to take a stab at that?.

Yes, happy to, Christian. So as we mentioned, Tycho, we're going to continue to push on the development here for the next couple of quarters. And we do expect to be getting into beta testing in the back half of this year. We're already running some customer collaboration samples in house.

And so I would expect even in advance of us formally getting into a beta program that we will be sharing more customer data that we generated with them. But absolutely, as we push through the back end of this year and get ready for the first -- the full commercial launch in the first half of '23, we'll be showing more of that.

And I think it's really important for people to be able to have that opportunity to assess the accuracy that we're providing with SBB versus other emerging SBS players as well as Chemistry X and others that are going to be demonstrating their utility in the back half of this year..

And then, Tycho....

And price per gig, Mark? Price per gig before we hand it over to Susan?.

Yes. Sorry, we haven't addressed that formally yet, but expect this to be comparable with other mid-throughput platforms. And in my mind, this is a mid-throughput platform at launch..

And Tycho, with respect to the contingent consideration remeasurement, so as you know, there was a milestone payment as part of the acquisition of Omniome. That milestone payment is held up on the balance sheet. And as we get closer to product launch, as we see positive momentum, you'll see some of that expense get transferred to the P&L.

And so the reason we had this $1.1 million expense is because we saw positive results in terms of our development activities with respect to that product launch..

Okay. And then last one, Christian, just on competitive dynamics. I appreciate your commentary on synthetic long-reads before.

I mean as we think about some of these newer entrants, including Element Loop, I mean, do you think this is market expansion here with new players coming into the market?.

Well, I think that -- on balance, yes, the market is large and growing, and there's room for lots of players. So I think it's market expansion. But I also think that I'm still a firm believer that, that synthetic long-read are stitched together short reads are not really a solution for clinical sequencing.

It's just not when you can -- when you get more information out of a native long-read, whether it's us or any long-read -- native long-read player, you're just going to have a more comprehensive view, you can resolve more biology. And if you can do it economically, there's no reason to scale to stitch together short reads.

And so from my perspective, I don't think that this is -- this has a material impact on our future.

But for the occasional customer that may have a short-read sequencer that they want to do some -- a little bit of long-read sequencing at less than 10kb or 10kb, I guess, perhaps, I could see that as those getting them inspired about long-reads at all, gives us an opportunity to sell into those customers when they start to get serious about, "Hey, we really need to integrate long-reads in a very serious way into our science and our workflow." So from that perspective, it will expand our market to be share..

And our next question comes from Dan Brennan from Cowen..

Great.

Maybe the first one, I know, Christian, you talked about record backlog, are you willing to provide any color on that backlog, maybe how it compared to last year? And any help on kind of how the split of that backlog occurs across the four different segments you discussed? And then mentioned on the commercial team, you discussed the total employee headcount, which went up a lot, but you also discussed the ability with new customers, the training that needs to occur in order to get them up and running.

I'm wondering could you give us some color about the external commercial team and maybe the internal team and where that stands today.

And are there plans in '22 to significantly expand that to meet the demand you're seeing?.

Yes. So Dan, thanks for that. First, I don't think I ever said that we had record backlog. And so I don't know if you heard that incorrectly. But I don't think we talked about backlog quite frankly at all in the entire call, so....

Maybe with funnel. Sorry about that. Maybe it was a funnel. I know that's -- yes..

Yes. So that's different than the backlog. I'd like to have that entire funnel in backlog, of course.

But the funnel -- what the funnel is, of course, is all of the people, all of the customers that have expressed interest in the products and are interested in buying either the sequencers or going to becoming part of -- looking for service labs to get our technology going, and basically, we characterize that funnel according to where we think they are with respect to stage of sale.

And the ones at the end are the ones that actually get into the forecast and then we close on those. And we have aggressively spent 2021, working on building those funnels, driving demand.

It was very surprising to me at how little outreach the company had done before I joined the company with respect to trying to reach customers across all the different geographies. I approved a job offer today just today for -- I think it will be our first head count or at least the only head count we have in Australia, for example.

And so hopefully, that will turn into someone joining the team there. But -- so that's what I mean by our funnels are bigger than they've ever been. In other words, we're seeing more opportunities. There's more excitement. The utility of HiFi sequencing, the completeness, the ability to call methylases is really going to help drive demand.

So all those things drive the funnel. With respect to headcount, I don't have the specific sales headcount in front of me, but we more than doubled -- we more than doubled our sales force in 2021. So I think we have almost 50 not quite direct sales reps.

In '22, we're going to continue to grow the sales force, really focusing on quota-carrying sales reps. So folks that can -- that will have quotas and will be accountable to meeting the customers.

We'll also be growing our ability to serve the customers, so the customer support and field application specialists particularly outside the United States in areas where we just have been underrepresented, so we'll be focusing there. But for the most part, most -- the heaviest lift was done in '21.

And so I'm really happy with that because that was really important to set the stage to drive long-term growth. And now it's a question of filling in around the edges and then getting after it and making it happen. So hopefully, that helps, Dan..

Yes. Sorry about that. And then as a follow-up, maybe two parter. Just POPSEQ, just wondering kind of where do we stand with all of us in the U.S.

I know there's some betas or kind of smaller subsets being done on long-reads? Do you have any viewpoint towards when that could expand possibly in the U.S.? I know you have the -- you discussed some news with. Just wondering kind of what's baked in for those in '22 and what the upside is? And then related to an earlier question.

So maybe we'll get some color on the follow-up.

I'm just wondering, baked in within the full year guide between instruments and consumables, you haven't given kind of a number or a range between how those 2 segments will break out for your full year guidance, have you? Or are you willing to do that?.

We did not give specifics about the composition of the revenue at this point. And I suspect we will give more color as we get deeper into the year about how that will go. We talked -- we did talk -- Susan did talk about the back half of the year being stronger than the front half.

And obviously, with our immediate headwind with COVID here, that seems pretty obvious probably at this point. But we do see the total business growing and our objective is to grow installs -- grow our installed base.

And of course, as these -- all of these installs that we did in '21 as well as what we'll do in the early part of '22, they'll all have a compounding effect on consumable revenue as those systems get up to speed and fully running. And so we do expect to grow across the board for the year, but we didn't give any specific numbers.

And at this point in time, I think it's better we monitor how we're doing and how that will transpire and give more color as we get deeper into the year. With respect to POPSEQ, the -- all of this program is actually. We are a small part of that program today with a key customer, quite frankly, running at full speed.

And so we're seeing lots of samples go through there right now. We -- there is lots of opportunity to expand all of us, and there is talk about expanding that program for long-reads more. We'll see what transpires. We have not included any of that in our forecast for the year, nor have we included a significant expansion at.

And so most of the really large kind of binary on-off-type projects we have kept out of the forecast because we're really focused on achieving and meeting our base business objectives across the entire installed base around the world and doing what we said we're going to do every single quarter.

And then as these opportunities emerge, of course, we're going after them, and we're trying to cultivate them, in fact. And as they come, and they come to fruition, then we will -- then that will give us opportunities to grow even faster. So that's how I look at it..

And this is going to be our last question coming from Ross Osborn from Cantor Fitzgerald..

So just going back to guidance and moving down the P&L, the gross margin. So you came in a couple of hundred bps ahead of The Street for the 4Q. But I believe you stated calling out some supply chain headwinds on the 3Q call.

Can you quantify the impact on the fourth quarter and then what you're seeing this year, just kind of given the bullishly guide? And then I'm going to have some follow-up question.

Just how comfortable are you with current inventory levels, given those headwinds and then estimated customer demand?.

Yes.

Susan, why don't you address the gross margins?.

Happy to. So in Q4, we started to see some of the impact from higher cost due to global supply chain constraints. But it didn't have a material impact. I would say it was 0.5% in Q4. Looking ahead into 2022, we do expect the impact on our gross margins to be higher. What I had indicated previously, I said 1 to 2 points of margin in 2022.

I think it's going to be at the higher end of that range, just given the nature of some of the costs rising. But what is good is that we're -- our procurement team is being very proactive about ensuring that we get the components we need to be able to meet demand. So from that perspective, we're doing very well, but it does come with a cost..

Yes. And when you think about kind of building up inventory to serve customers, one thing that I've asked the team to do is build up some more SMRT Cell inventory than we normally -- otherwise would normally carry.

And the reason for that is if parts of our team got COVID and we couldn't manufacture for a while, I want to make sure that we don't have any supply disruption. And the teams responded beautifully to that.

And the purchasing group doesn't get enough credit, quite frankly, they've secured the vast majority of supply required to manufacture what we see as the demand for SMRT Cells over the course of the year. On the instrument side, it is a bit more hand to mouth in the sense that we're fighting for the same FPGAs and other ICs that other companies are.

But so far, it hasn't had an impact on our business and -- looking ahead in the near term, it doesn't look to have a significant impact to the team. It's been able to manage that risk appropriately.

So it is something that we're looking at every single day and making sure that we could serve all of our customers around the world in the best way that we can..

And now I would like to turn the call back over to Christian Henry for closing remarks..

Sure. Thank you. So let me just wrap up and thank everyone for participating today. We had a great year in 2021, and we're -- that we've put the company in the best position in its history, to have another record-setting year in '22.

The year so far has gotten off to a bit of a slow start given what we see to be some COVID headwinds, particularly on consumables, and we're working through that week by week. But we do expect as COVID starts to wane, that demand will accelerate -- or activity will accelerate, which will drive further demand.

And so -- we just want to thank everyone on the call for your support, and we look forward to updating everyone as the year progresses. So thank you very much..

And thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..