Pacific Biosciences Of California, Inc. Q2 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc. Second Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host today, Mr. Todd Friedman, Director of Investor Relations. Sir, you may begin.

Good afternoon, and welcome to the Pacific Biosciences Second 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 in the Investors section of our website or alternatively as furnished on Form 8-K available on the Securities and Exchange Commission website. With me today are Christian Henry, President and Chief Executive Officer; Susan Kim, Chief Financial Officer; and Mark Van Oene, Chief Operating Officer. Similar to last quarter, we're hosting our conference call from a number of different locations. So bear with us if there are any technical issues or pauses. 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 further 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 or 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 today. To start, I’d like to welcome the Circulomics team to the PacBio family. As you may have seen, this morning, we announced that PacBio has acquired Circulomics, a long-read sample prep company specializing in manipulating high-molecular-weight DNA, especially in extraction. Circulomics sells its products to approximately 700 customers worldwide. These customers use Circulomics' sample prep solutions across almost every sample type, from cells, bacteria, and blood to animal tissue, insects, fungi, and plants. Several large sequencing initiatives have used Circulomics' Nanobind extraction kit, including customers like the NIH Center for Alzheimer's and Related Dementias, who use it to extract DNA from blood and brain samples. Nanobind was also used by biologists to sequence the 27 gigabase hexaploid giant redwood genome. As I've indicated in the past, an important part of our acquisition strategy is to obtain capabilities that will improve our overall sequencing workflows for our SMRT Sequencing platforms. With Circulomics as part of PacBio, we will be able to leverage both their proprietary Nanobind technology and significant technical expertise into our complete sequencing workflow, which will simplify our sample and library preparation processes and ultimately enable our customers to consistently generate even higher quality, HiFi data. The Circulomics team is based in Baltimore, Maryland, and will report to Dr. Cathy Ball, our Senior Vice President of Research. Finally, I want to assure all of Circulomics' current customers that we will continue to support all of the current products on the market even for those customers that use other platforms that require the extraction of high-quality high-molecular-weight DNA. As we shared a few weeks ago, we also entered into an agreement to acquire Omniome, a San Diego-based company developing a proprietary short-read DNA sequencing platform capable of producing highly accurate sequencing data. Omniome's technology has the potential to reimagine the possibilities of short-read sequencing in areas like liquid biopsy, minimal residual disease, and other clinical applications. These two acquisitions underscore our commitment to strengthening long-read HiFi sequencing as we begin to position it for clinical germline applications and our strategy to build scale by adding a differentiated technology that is intended to allow us to serve more customers more broadly. With respect to the proposed acquisition of Omniome, I am pleased to report that we have filed all required regulatory documents, and we continue to believe that we are on track to complete the acquisition later this quarter. Now let's turn to second quarter highlights and talk about the business. We continue to see strength in our business as PacBio achieved its second consecutive quarter of record revenue. Product and services revenue of $30.6 million was in line with our expectations and represented an increase of 6% sequentially and grew 79% compared to the second quarter of last year. The record quarter was driven in part by strong consumable sales. Consumable revenue of $12.2 million was up 18% sequentially from the first quarter of 2021 and grew over 150% compared to the second quarter of 2020. PacBio's growing consumable revenue is a result of the Sequel II and IIe installed base expansion. In the second quarter, we installed 38 Sequel II and IIe Systems, bringing the total installed base to 282 compared to 148 at the same point last year. Our second quarter placements included 10 Sequel IIs and 28 Sequel IIes. About one-fourth of our Sequel II and IIe placements were to new instrument customers. Nearly half of our installed base is now using the Sequel IIe platform, meaning more customers are benefiting from significant compute savings and can spend less time on data processing. Some of our new customers in the quarter included Dante Labs, an Italian company planning to use HiFi sequencing to transport health information into diagnostic and therapeutic solutions. Additional new customers also included an academic reference laboratory that purchased and installed a Sequel IIe to expand rare and inherited disease research, where short-read exome and short-read whole-genome sequencing was unable to explain a newborn's condition. From a regional perspective, Asia Pacific's strength in instrument placements continues on HiFi sequencing. In China, Novogene expanded its PacBio fleet with an order of 8 Sequel IIe Systems, some of which were installed and recognized as revenue in Q2. This was a competitive win, and Novogene is adding capacity for human genomic and de novo agricultural studies. Novogene has already completed over 2,600 projects on PacBio technology, including animal and plant de novo genome sequencing, microbial sequencing, full-length transcriptome sequencing, and human genome sequencing. These systems will help them further scale their HiFi sequencing services to customers all across China. In Japan, a new PacBio customer, a bioengineering lab, adopted the Sequel IIe to run its metagenomics and de novo plant and animal projects. This customer previously used another long-read technology but adopted PacBio sequencing because of HiFi accuracy and completeness. Moving to EMEA, strong consumable sales were driven by growth in plant and animal sequencing as our customers leverage our highly accurate long reads to understand the genetic variation that can ultimately help organisms adapt to changing climates, conserve endangered species, and produce higher-yielding and disease-resistant crops. Also in Europe, the Genomics Core Leuven installed their Sequel IIe, the first in Belgium, and will use their new instrument to research structural variation and other human applications. Finally, the Americas region had record revenue in the second quarter. Sequencing for the NIH's All of Us Research Program is underway and is expected to add thousands of high-quality long-read genomes to the program's database over the coming quarters. COVID surveillance using PacBio sequencing continued in the second quarter, contributing to modest consumable revenue with volumes slowing in June corresponding to the overall COVID cases declining in the United States. In the second quarter, we booked another Sequel IIe System at a university lab to ramp up their COVID surveillance efforts and to detect other emerging viruses. We remain committed to serving the broader surveillance need especially in light of the growing Delta variant, and we expect to offer our fully-kitted COVID solution before the end of the year. Taking a step back from business updates, this past quarter was a landmark in the ongoing genomics revolution. Nearly two decades after the completion of the Human Genome Project, researchers finally assembled a human genome in its entirety. We believe this speed could not have been done without our highly accurate, long HiFi reads. This new sequence decoded the last 8% of the genome that had been missed for years. The new reference now includes assemblies for all 22 autosomes plus chromosome X, including 200 million base pairs of new sequence containing over 2,200 gene copies, 115 of which are predicted to be protein coding. I'd like to congratulate everybody involved in the telomere-to-telomere consortium, and we are incredibly proud of the contribution PacBio sequencing made to this important effort. This study shows there is still so much to learn about the genome, and highly accurate long reads are one of the best technologies to teach us. The goal of research initiatives like the telomere-to-telomere consortium is to gain deeper understanding of biology so that we can ultimately better human health. We share this mission with our research customers, which is why we continue to collaborate with leading institutions like Rady's Children's Hospital to demonstrate PacBio sequencing in the clinical research setting. As part of our collaboration, PacBio and Rady's will work together on a study focused on long-read whole genome sequencing of rare disease cases for which previous short-read whole genome and exome sequencing yielded no answers. The study, which is currently underway, already detected variants unidentified by other sequencing methods. Staying on rare and inherited disease, we are pleased to see that ACMG updated its guidelines and now provides a strong recommendation to support the use of exome or genome sequencing as either a first- or second-line test in patients presenting with congenital anomalies or intellectual disabilities. These updated guidelines can provide clinicians with justification for ordering sequencing-based tests and may ultimately reduce the diagnostic odyssey for patients and their families. We strongly believe HiFi whole genome sequencing technology could be used to develop first-line tests as it elucidates parts of the genome undetected by other technologies. Short tandem repeats, for example, have proven association with dozens of disorders and are challenging areas for other sequencing technologies to sequence. As a recent study by researchers from the Garvan Institute in Australia explained, established short-read NGS platforms are unable to genotype large and complex repeat expansions, potentially leaving cases unsolved. We also believe that our HiFi sequencing can address other key clinical applications. For example, our collaboration with Berry Genomics continues to show the benefit of PacBio sequencing in its thalassemia carrier screening test, which is in development. Research results from their latest study in July reveal that HiFi sequencing was able to identify all panel variants present with no false negative results and was able to improve carrier assignment through the identification of rare variants missed by current panel tests. Additional studies continue to show HiFi's utility in pharmacogenomics. Last month, scientists at Leiden University Medical Center used PacBio sequencing to develop a computational method that significantly improved the prediction of drug metabolism based on the CYP2D6 sequence. CYP2D6 is responsible for the metabolism and elimination of approximately 25% of the clinically used drugs and is difficult to sequence due to its pseudogene and several structural variants. This is just one more example of where having complete long-read gene information can be clinically beneficial. Turning to our organizational updates. We made significant progress in expanding our team. We added 11 quota-carrying sales representatives in the second quarter, bringing the total to 39 at the end of Q2. We're well on our way to achieving our goal to double our ending 2020 sales rep headcount by the end of the year. We also successfully broke out our Americas and EMEA regions with the hire of Neil Ward as the EMEA General Manager. Neil brings extensive experience developing sequencing markets in the region and deep customer relationships with his time working with the UK Biobank and Genomics England. Under Neil's leadership, the EMEA region will have an increased focus on the end customer. We added other key leadership positions to our team during the quarter, including hiring Dr. Cathy Ball to lead our newly created research function. This function will focus on directing investments into early research and technology development activities to broaden our toolkit and feed our product development pipeline. I’ll now turn the call over to Susan to discuss our financial results. Susan?

Thank you, Christian. As discussed, we achieved another record in the second quarter with $30.6 million in revenue, which represented an increase of 6% from $29 million in the first quarter of 2021 and an increase of 79% from $17.1 million in the second quarter of 2020. Instrument revenue in the second quarter was $14.3 million, a decrease of 4% sequentially from $14.9 million in the first quarter and a 60% increase from $8.9 million recorded in the prior year quarter. We delivered 38 Sequel II and IIe Systems during the second quarter, growing the installed base to 282 systems as of June 30. Consistent with last quarter, about three-fourths of these shipments were Sequel IIe Systems. Customers continue to upgrade to Sequel IIe from Sequel II in the second quarter, representing approximately $400,000 in revenue. Turning to consumables, revenue of $12.2 million in the second quarter grew 18% sequentially from $10.4 million in the prior quarter and was up over 150% from $4.8 million in the second quarter of last year. The growth in consumable revenue reflects increased SMRT Cell usage as a result of our growing installed base of Sequel II and IIe Systems. Sequel II and IIe consumables represented approximately 85% of our total consumable shipments in the second quarter, with the rest from older systems. We continue to expect the proportion of consumable sales from Sequel II Systems to grow as the installed base for these systems expands and customers migrate to our newest platforms. Annualized pull-through revenue per system on the Sequel II and IIe installed base in the second quarter approximated $170,000. Finally, service and other revenue grew to $4.1 million in the second quarter compared to $3.7 million in the prior quarter and $3.3 million in the second quarter of 2020. Our service revenue growth reflects the growing installed base of Sequel II and IIe Systems. Moving to gross profit and gross margin. Second quarter gross profit of $13.8 million was in line with our expectations and represented a gross margin of 44.9% compared to gross profit of $13.0 million or 44.8% in the first quarter of 2021. Year-over-year gross profit more than doubled to $13.8 million, driven by the growth in revenue with gross margin approximately 6.2 points higher primarily due to higher volumes and higher utilization in our factory. Moving on. Operating expenses were in line with our expectations. Operating expenses in the second quarter of 2021 totaled $51.3 million, up 10% sequentially compared with $46.7 million in the first quarter and 70% higher than $30.1 million in the second 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 as we continue to build our commercial and R&D organizations. In terms of headcount, we ended the quarter with 492 employees, 57 more than where we ended the first quarter. We grew our quota-carrying sales force by 11 people, the majority of whom were added to our Americas and EMEA regions, bringing the total to 39, and we're well ahead of our target to double our ending 2020 sales rep head count. We also added new hires in our research and development organization to support our growing number of initiatives. Noncash stock-based compensation included in operating expenses was $13.9 million in the second quarter compared to $9.2 million in the prior quarter and $2.8 million in the second quarter of 2020. Other income and expense in the second quarter of $3.4 million reflects a full quarter of interest expense associated with our convertible notes. Second quarter net loss was, therefore, $41 million and a net loss per share was $0.21 compared to the net loss of $87.4 million and net loss per share of $0.45 in the first quarter of 2021 and a net loss of $23.1 million or $0.15 per share in the second quarter 2020. As a reminder, net loss in the first quarter of 2021 included a $52 million expense related to the repayment of continuation advances to Illumina due to our $900 million convertible note financing earlier in the first quarter. Now turning to the balance sheet. We ended the second quarter with $1.14 billion in unrestricted cash and investments compared to $1.16 billion at the end of last quarter and $319 million at the end of 2020. Inventory balances increased in the second quarter to $18.0 million, representing 3.9 inventory turns compared with $16.3 million at the end of the first quarter of 2021, which represented 4.2 inventory turns. Accounts receivable increased in the second quarter to $19.9 million, reflecting a DSO of 49 days; compared with $12.9 million at the end of the first quarter of 2021, reflecting a DSO of 46 days. The increase in accounts receivable and DSO compared to the first quarter were primarily a function of revenue linearity in the second quarter. Long-term deferred revenue grew approximately $4.5 million in the second quarter to a balance of $10.2 million, the increase reflecting largely the cash received from Invitae as part of our collaboration agreement to develop our ultra-high-throughput sequencer. Now moving to guidance. I'd like to take this opportunity to provide our estimates for fiscal year 2021. We continue to see growing customer demand for our Sequel II/IIe platform in our HiFi chemistry. As a result, on a quarterly basis, we expect revenue to continue growing sequentially. However, the quarterly revenue mix can shift based on the volume of instrument placements in any given quarter. Additionally, multi-instrument orders from customers with larger projects can add additional variability to the timing of orders in any particular quarter. For the full year 2021, we expect revenue to grow in the range of 62% to 67% compared to 2020, which represents revenue of approximately $128 million to $132 million with sequential growth in each Q3 and Q4. In the first half of 2021, we placed 79 Sequel II and IIe Systems, which exceeded our internal expectations, and we continue to project the number of installs to grow in the second half relative to the first half, reflecting our increased commercial presence and customer demand. Moving down the P&L. We expect full year 2021 gross margins to be between 45% and 46%. For operating expenses, we expect the full year to be between $218 million and $222 million, which includes Invitae R&D expenses, which we estimate between $20 million and $25 million for the full year. As a reminder, as part of the terms of our convertible notes, we expect to incur approximately $3.5 million in interest expense every quarter going forward until maturity or conversion of the notes, which represents 1.5% interest per annum and amortization of debt issuance costs. We expect the weighted average share count for purposes of EPS for the full year to be approximately 200 million shares. Please note that these estimates exclude the impact from the proposed Omniome acquisition and the related PIPE financing announced last month. We do expect that the first full quarter post-closing of the Omniome acquisition will increase our quarterly operating expense run rate by approximately an incremental $12 million to $19 million. We expect the impact from the acquisition of Circulomics to have an immaterial contribution to our P&L in 2021. We are also mindful that there is a growing uncertainty around the COVID-19 Delta variant and its effect on commercial activity, and therefore, our estimates reflect our best estimates given the current state of the pandemic. With that, I will turn the call back to Christian.

Thank you, Susan. When I joined PacBio last September, I laid out a clear plan to drive revenue growth, expand our product offering and to show how PacBio HiFi genomes can have a real impact in clinical whole genome applications. We've now had five consecutive quarters of revenue growth, achieving quarterly revenue over $30 million for the first time. Our results indicate that our commitment to commercial expansion is beginning to drive us forward. We've also been able to expand our research and development teams and are progressing well against developing our multiproduct, long-read sequencing portfolio that we expect will enable our customers to dramatically expand the size of their projects as we push the cost of HiFi sequencing well below the $1,000 genome barrier. Finally, we have entered into several transformative collaborations that are demonstrating the power of HiFi in understanding the genetic basis for rare and undiagnosed disease. Additionally, with the acquisition of Circulomics, we are delivering on our strategy to dramatically improve the front end of our SMRT Sequencing workflow so that customers can operate at greater scale with even better sequencing results. Our announced acquisition of Omniome represents the beginning of a new era in sequencing. Omniome's highly accurate short-read sequencing platform is expected to enable us to enter into large markets where our long-read sequencing technology has not historically been able to access. We will soon have the ability to offer our customers the right sequencing technology for all of their applications. We will reach more customers than ever before, which will not only lead to the sales of Omniome's platform but our Sequel platforms as well. The addition of the Omniome team will also allow us to further scale our organization to meet the challenges of the future. To close, I am both pleased with our continued execution and excited to drive further expansion into our end markets. It's rewarding to see firsthand how our technology is enabling better science. Looking at the sequencing landscape today, I am confident that there are thousands of more customers that can realize the benefit from highly accurate and complete sequencing, and it's our mission to bring that to them. Thank you. And with that, I'd like to open up the call for questions.

The first question comes from the line of Tycho Peterson from JPMorgan.

Christian, I want to start with one on Omniome. One of the questions we've gotten is just they're using emulsion PCR upfront, and that's been a cumbersome issue for some of your competitors in the past. So I guess, in your view, how easy is it going to be to kind of move away from that? And can you maybe talk to some of the steps that are required? We've heard anecdotally that maybe you have to redesign the flow cell. You may need to innovate around the chemistry. So I'm just curious, as you think about kind of the roadmap in that path to first commercial launch in the first half of '23, what are some of the key steps you think that need to be taken here? And then does Circulomics play in that? And is that here on the sample prep side? Or is that mainly for Sequel?

Okay. So with Circulomics, we'll just start there, Circulomics is principally driven for the Sequel platform and long reads. The team there is world-class at understanding how to handle long fragments of DNA, and we're going to leverage their capability into our long-read workflow. That being said, they're experts in thinking about handling DNA in general. I suspect, over time, they may find their way onto the Omniome side of the equation as well. The principal is really developing our long-read workflows. With respect to Omniome, we were very thoughtful about that, about ePCR and thinking through how do we get broad market adoption. We think ePCR could be useful in some applications, but the reality is that we would prefer to have a different clustering capability. We were doing the diligence, we definitely approached with some different methodologies. One of the reasons why we decided to slow the development down because I think, as I've said a couple of weeks ago, they were ready to go to beta is in order to really nail down that clustering method so that we can operate at a much bigger scale, a much higher density. We believe that we can get that done. Interestingly, we'll be leveraging some of the internal PacBio expertise to help in that mission, which is pretty exciting.

Okay. That's helpful. And then a follow-up unrelated question around guidance, I guess, two parts. Just any color you can give us on 3Q versus 4Q? Just trying to think about kind of year-end budget flush and how you're thinking about the sequential step-up into 4Q. And then given that you are guiding a bit below The Street at $134 million, I'm just wondering if there are things that would drive you to the upside, for example, like COVID surveillance. Did you bake anything in for that?

Yes, Tycho, that's great. I think Susan, in her remarks, tried to point out that we expect to continue growing sequentially. So we would expect Q3 to be better than Q2 and Q4 to be better than Q3, and so I would be thinking along those lines. We guided in a pretty tight range in where The Street is. We're in the same ballpark. We're just looking at trying to think through the environment with respect to COVID and Delta variant and where the state of the market is. The good news is that we have record demand generation coming into our funnels in Q2, starting in Q1 and ramping in Q2. We're continuing to expand the sales force. So I'm very optimistic about our opportunity that's in front of us. We thought that as we put guidance out for the first time on an extended basis, that we would be thoughtful about our estimates.

Yes, that's very helpful.

The next question comes from the line of Tejas Savant from Morgan Stanley.

I just want to follow up on the guidance question that Tycho just asked you. Specifically in terms of the instrument installed cadence. Christian, you had about sort of 41 units in the first quarter and 38 here. Was there any pull-forward from multiunit orders or some such that we need to be thinking about? Because it looks like in terms of installs, we are sort of flattish in the third quarter with a slight tick-up in the fourth quarter. So just trying to do some quick mental math here in terms of what it implies for your instrument placements this year.

Yes. I do believe that instruments are going to grow in each quarter from here. The reality is that when we get larger instrument orders, the timing of when they come in—did they come in, in the third quarter or did they come in, in the fourth quarter—tends to be variable. And unfortunately, when we’re still a little bit small, a few instruments have an impact on other businesses when you look at the consumables still not being larger than instruments. Now you saw in Q2, we had a great consumable quarter, and I think that the installed base growth is starting to pay dividends for us on that front. You'll continue to see that through the rest of the year. But I'm very encouraged at what we're seeing in the sales funnels with respect to the instrument placements. The more we can place the instruments over time, that will drive consumable growth, which will help drive gross margin expansion and create more sustainable, long-term growth.

Got it. Very helpful. And then one quick one on Circulomics. Can you—I know the press release said that the contribution for '21 is pretty small. But as we think about the longer-term trajectory here, can you help us dimension the size of that opportunity and perhaps share what fraction of the sales are from customers who are using other long-read technologies in the market?

Well, I think we'll give some generalities. The reality is their revenue is very small, which is why we said what we said in the press release. They do have a significant proportion going to other technologies, and that may or may not continue. It's our intent to fully support all of those customers in the market. I was on the phone with competitors this morning reassuring them to that effect, that we will support everyone in the market. What you really need to think about is how this impacts our sequencing workflow and allows us to make the upfront extraction and sample preparation easier so that customers can scale faster using the SMRT sequencing technology. So the real benefit here is to our base business and to our ability to accelerate our consumable pool because customers will have it easier. This is going to be especially important as we think about launching new platforms that can sequence many more samples per year than our current platforms can. We're really setting the stage to be ready to operate at a very high scale.

Got it. And one final one for me, Christian. Can you just confirm your plans on the core sort of Sequel platform in terms of new chemistry or software releases? Should we expect one around that time ESHG time frame like PacBio has done in years past? And sort of on a related note, I mean you're integrating a couple of deals here and managing these external collaborations as well. What are you doing internally to make sure that the focus on the Sequel commercial scale-up and onboarding all these new employees remains intact?

Yes. That's a really, really important question. The truth is this would be possible if it started with the vision of having a great senior management team capable of handling scale. If you look at the leadership team that I've been fortunate enough to recruit, all of these managers have significant experience operating at multibillion-dollar scale. We put that team in place. We can leverage those capabilities to keep us laser-focused on developing long-read technology and taking the foundational assets of the company to the place they need to go. There's significant opportunity in long-read sequencing, and we will continue to make sure we don't take our eye off the ball there. With respect to the Sequel platform, we will continue to develop and improve it. Although I'm not going to comment on the timing of enhancements to the platform on this call, rest assured we will continue to improve that platform, make it more robust and more valuable to our customers so that we can keep expanding our installed base.

Your next question comes from the line of Steven Mah from Piper Sandler.

So one on Sequel II ASP trends. I'm just looking at my model, and it looks like ASPs for Sequel II in the quarter ticked up incrementally. I'm just wondering if you can confirm that and then maybe some of the rationale and some of the trends that caused that. Was it due to less multiunit orders, or was it something else?

Yes. Susan, do you want to comment on the actual ASP in the quarter?

Happy to. So that is confirmed that the ASP incrementally was higher in Q2 than Q1, but it's not materially different. You're right that there is a mix shift in terms of the instruments that come in with respect to multiunit orders. We had multiunit orders in Q1. We had multiunit orders in Q2, so it's not a big driver, but also, the ASP difference isn't that large between the two quarters.

Some of it's also regional differences where, in any given quarter, the ASPs might be a little different from region to region. I don't think there was enough of a difference to really see a fundamental change in the way we're selling. In fact, I've instructed the sales force that instrument placements are a top priority, and that we're going to keep building out that installed base. We're happy with the ASP in Q2, but it really wasn’t much.

Okay. And then maybe just a follow-up, talking about Sequel II. Can you give us a sense for 2022 Sequel placements, given all the investments in sales and marketing and the commercial organization and sales force?

Well, I think that if you look at the demand generation in our funnels, if that's any indication, there is an opportunity to continue growing. We’re not in a position to start guiding to '22 yet. The reality is we are starting to reach more customers than the company ever has before, and that very fact is starting to spread the word, so to speak, of HiFi, which we believe will generate demand. When I first joined the company, one of my foundational strategies was to increase our commercial footprint. We're really growing our commercial footprint and then backing that up with enhancements to the Sequel platform that make it more useful. You're seeing consumables grow and total revenue of the company grow. We've had five quarters in a row of sequential growth now, and we’re really starting to get some momentum going. I'm excited about the rest of this year and 2022 as well, but it’s probably too early to really comment on anything specific.

Okay. Yes. I appreciate the color you're able to provide. So maybe just moving then on to the consumables. I know you did about 170,000 per instrument this year. Is that a good run rate going forward? Also, could you give us a sense—given that you guys are placing so many more instruments now—could you comment on the consumables ramp on a new Sequel II instrument?

Yes. I think in general, it still takes customers a few quarters to ramp to a reasonable run rate. That will depend on if it's a brand-new customer or an addition to their installed base. Imagine a core lab that has a 3- or 4-month backlog; if we put a new system in there, they're going to ramp very quickly, whereas a brand-new customer will take a little bit longer to get the workflows nailed down and how they're going to analyze the data. It’s going to be variable. Where we are in the 170,000 is not unreasonable. You see it bounce around from quarter to quarter. That’s a little dependent on how customers take their shipments and also on how many systems we’re placing in any given quarter. On balance, these are pretty reasonable places for us to be.

Okay. Great. If I can sneak in a final one regarding Circulomics. You mentioned in the press release the potential for an automated workflow. Do you envision staying as a stand-alone instrument? Or would you integrate it with Sequel II? And if you are integrating it, are you going to integrate it into the low-cost, long-read clinical sequencer you're developing with Invitae?

Yes, happy to. I do believe that at least initially, this would be a stand-alone instrument for automation. One of the great things with these Nanobind disks is that they are a little bit easier for us to automate. Think of this as a stand-alone, not something that I would initially try to integrate into the Sequel platform. The focus right now is to further this with long reads. There are synergies of the team and there are opportunities for us to explore how we could use this for extraction and purification for short-read technologies, but the focus initially is to make sure that we’re optimizing the long reads.

Our last question comes from the line of Kyle Mikson from Canaccord Genuity.

Can you hear me?

Yes, there you go. Hey, Kyle.

Okay, sorry, guys. Sorry for the audio. Congrats on this acquisition today. I know it's small, but it's nice to see everything kind of coming together. On Circulomics, obviously, you're investing now and optimizing the front end of the workflow. You've already got a great long-read and, I think, a short-read platform as well. I'm just curious if you're interested in deploying capital to maybe inorganically enhance the back-end technology and analytics similar to what Illumina has done with Edico, BlueBee, and Enancio recently. I think it's interesting because, back in 2011, when they acquired Epicentre and then, from there, went on to have some clinical deals. It's an interesting kind of topic; the parallels are interesting. I'm curious to hear your thoughts around the bigger picture here and your thoughts on the analytical data side too.

Yes. I think, Kyle, thank you for the question. The truth is we are looking across the entire workflow, starting with sample prep because we really need to make sure that we get very high-quality DNA going into the sequencer so that we get high-quality data coming out of it. But this— the back end and the informatics and data science side is going to be very, very important to us as we get to scale with the next generation of systems and with our collaboration with Invitae. So yes, we're thinking through strategically how do we address that side of the equation and what are our opportunities. It definitely is on our radar. Nonetheless, what’s most important is making sure that we get a strong workflow up to the data analysis part. As we get new systems to market and really start to think about how to integrate the data infrastructure between both Omniome and the PacBio infrastructure, it’s clearly on our radar, but it's one step at a time.

Okay. That's helpful. I guess just sticking with Circulomics. The kits appear to increase the yield on high sequencing. But does that impact the cost at all? I just wanted to understand that. It seems like there's more of an emphasis lately on accuracy and read length. They weren't exactly talked about as bottlenecks months ago. If you were to update your list of priorities, where does reducing the cost, like we talked about in the past, fall on that list now?

It's still right at the top. I think making sample prep easier gives you more yield through the sequencer. More yield means lower cost per base so, therefore, lower cost overall. Driving the cost down still is a very, very top priority. The second priority is ensuring each system has the throughput that operates at the scale the customer is looking for. We need to make sure we build out our platform so that it can do large numbers of samples at a low cost. These interrelated aspects begin with the actual cost per base and then go to the throughput, which lowers the cost of capital as you amortize it in a lab. Data quality, read length, accuracy—none of that can be sacrificed because we are the leaders in the market in accuracy. We need to continue that going forward while driving costs down and driving scale up for everyone.

Okay. Awesome. Susan, I just had a question for you. On the Invitae agreement announced back, I guess, in January, we've discussed the economics. But I know that a certain portion of revenue is going to hit the P&L at some point. Is that included in this outlook for the end of '21? How should we think about that, the top line impact from the Invitae agreement?

Kyle, the way to think about that is the revenue won't hit until we launch the product. The investment Invitae is making is sitting in our long-term deferred revenue balance on the balance sheet, and none of that hits the revenue in 2021.

Okay. Got it. That’s right. Just one last question for me. Christian, it's been about a year since you kind of took the role of the CEO. If you look back and kind of reflect on the past year, some of those objectives that you've put out there, how would you kind of say the company has done executing on those? And what your goal is now looking forward a year in advance?

I am really proud of what we've been able to accomplish in just a short period of time. We’ve transformed the company in basically every respect. We've taken the lead in long-read sequencing and deployed a new commercial organization to accelerate revenue and get more customers using the technology than ever before. We've created a new leadership team and a bold vision of where this company could go, thinking about being a multi-omics platform where we can solve customer problems. I've built a leadership team that’s second to none. We’ve exceeded my expectations for the first year. However, we’re at the very beginning of this journey. The genomics landscape has many opportunities in front of us. The Omniome acquisition effectively doubles the potential TAM of $20 billion. We have the management team and ability to develop and execute to take advantage of that. People think of PacBio a lot differently now than they did 12 months ago. I’m excited about what we’ve done and even more focused on what's to come in the next couple of years.

That's great. Well said. I'm really excited to see that going forward.

Thank you.

I am showing no further questions at this time. I would like to turn the conference back to Todd Friedman for closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.