Pacific Biosciences Of California, Inc. Q4 FY2021 Earnings Call

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, everyone. I appreciate you joining us. In 2021, PacBio experienced a significant transformation. Before we proceed with our prepared remarks, I want to acknowledge and thank all our employees for making this transformation possible by executing our strategic vision. Today, I will begin with a brief update on our fourth quarter performance. Then, I will discuss how we implemented our strategy in 2021 to lay the groundwork for long-term growth and outline our strategic priorities for 2022. Following that, I will hand the call over to Susan, who will delve into our financial results and provide a comprehensive overview of our full-year guidance. The fourth quarter concluded PacBio's most transformative year. We achieved record quarterly revenue of $36 million, marking a 33% increase compared to the fourth quarter of 2020 and marking our seventh consecutive quarter of growth. For the full year, we posted revenue of $130.5 million, a 65% increase from 2020, largely driven by the growing adoption of the Sequel II and IIe platforms. We nearly doubled our installed base in 2021, with customers globally utilizing our systems to generate the most accurate and complete sequencing data available. In the fourth quarter, we installed 48 systems, a new quarterly high, bringing our total installed base to 374 units, which is an 84% increase from the end of 2020. Notably, over half of the system orders in Q4 came from new PacBio customers, the highest number since the Sequel II launched nearly three years ago. Many shareholders have inquired about how we can measure the success of our investments in commercial infrastructure. I want to share some insights showing how our expanded commercial organization is beginning to yield results. Throughout the year, we accelerated the number of new instrument orders received and recognized as revenue within the same quarter, a metric referred to as instrument turns. For instance, in Q1, roughly half of our new system placements came from orders turned in that quarter. By Q4, nearly 90% of our instruments were turned within the quarter, demonstrating that we are reaching more customers and converting interest into sales more quickly than ever. This, along with the significant portion of new instruments placed in Q4 that went to new customers, indicates our strategy to broaden our global commercial presence is successfully cultivating demand across all markets. Encouragingly, over half of our new instrument customers are focusing on human germline sequencing. For example, Cincinnati Children's Hospital purchased its first PacBio system in Q4, intending to apply the platform across a wide array of human research applications. In 2021, one of our strategic priorities was to showcase the benefits of HiFi sequencing in clinical whole-genome applications. I would like to highlight some recent progress towards this goal. Throughout the year, we initiated collaborations with leading institutions such as Rady's Children's Institute for Genomic Medicine and Children's Mercy Hospital in Kansas City. These collaborations have yielded compelling data demonstrating the advantages of long-read HiFi sequencing, which can identify genomic variants that are challenging to detect using short-read technologies, ultimately improving diagnostics for rare diseases. We believe that these successful partnerships will drive significant growth as we introduce higher throughput systems. In Q4, we further expanded our collaborations. For instance, ARUP Laboratories will investigate HiFi whole-genome sequencing as part of the Utah NeoSeq Project, aimed at providing genetic diagnoses for patients in neonatal intensive care. Likewise, researchers at UCLA Health will explore how diagnostic yields can improve for unresolved cases by utilizing full-length isoform sequencing and long-read whole genome sequencing on our instruments. Projects like these are advancing not only in the U.S. but globally, with programs like Care4Rare Canada Consortium combining results from negative short-read sequencing tests with our long-read whole-genome sequencing. We delivered two additional Sequel IIes to Sidra in Qatar, where HiFi whole-genome sequencing is being utilized to gain better insights into rare diseases. In the Netherlands, we supplied two more systems to Radboud University Medical Center, allowing them to scale HiFi sequencing for initiatives like the SOLVE-RD European research program. Radboud has been utilizing our sequencing technology for several years, and according to one researcher there, the HiFi genomes produced with PacBio technology are likely the most comprehensive they've encountered. The significance of HiFi genomes becomes evident in identifying disease-causing structural variants that were previously hidden. Another exciting initiative is our pilot study with Genomics England. This organization previously sequenced over 100,000 whole genomes using short-read technology, primarily from patients with rare diseases or cancer. Although this program delivered valuable findings to many families, around 75% of rare disease cases remain unresolved. Our pilot study aims to sequence samples from a selection of these unsolved cases, and we have already received our initial batch of samples. We hope that insights gained from this study may lead to new therapeutic or clinical trial options for patients with rare diseases. Our goal is to illustrate the potential of HiFi sequencing in helping these families discover answers. A further strategic priority in 2021 was to expand and accelerate our product development pipeline. By enhancing our product development programs, we aim to introduce multiple sequencing platforms, providing customers with a range of technologies tailored to their research needs. From our long-term partnership with Invitae on high-throughput development to our acquisitions of Circulomics and Omniome, along with our recently announced desktop sequencer collaboration with Berry Genomics, we have evolved PacBio from a single product focus to a company ready to deliver multiple platforms and core technologies that address the entire sequencing market. Our efforts are not limited to new sequencing platforms; we are also dedicated to developing comprehensive solutions for our customers. For instance, we launched our first fully integrated solution, HiFiViral, which was conceived, developed, and commercialized entirely within 2021. This kit equips Sequel II and IIe customers with everything they need to sequence the SARS-CoV-2 virus, providing what we believe to be the most thorough view of the SARS-CoV-2 genome on the market. Its unique design enables the detection of emerging variants without requiring a kit redesign. Within just 1.5 months of sales in Q4, we shipped the kit to 20 global customers, significantly contributing to the placement of several Sequel IIes in public health labs during this quarter. We anticipate ongoing demand from research customers, particularly public health labs interested in HiFiViral, which will help lay the groundwork for future kit development. Looking ahead to 2022, PacBio will continue to enhance the ecosystem surrounding HiFi sequencing, which we expect will lead to a variety of customer-focused applications. We are collaborating with organizations like the Broad Institute to extend its single-cell Iso-Seq method to more PacBio users, as well as working with Twist Bioscience to create kits around HiFi sequencing for applications such as pharmacogenomics and targeted panels exploring the less characterized regions of the genome. As HiFiViral drove incremental Sequel IIe sales in Q4, a robust ecosystem offering application-specific kits will be critical in driving our future growth. In April, we launched our Version 10.1 sequencing kits, significantly enhancing performance, speed, and throughput on the Sequel IIe. This update improved the polymerase, allowing for a greater number of sub-reads, increasing HiFi data output, and reducing DNA input requirements by threefold, thus broadening the range of sample types available for HiFi sequencing. We are planning another update to our library preparation and sequencing kits for the Sequel II and IIe platforms this April. These kits will halve the upfront workflow time, require customers to order and store fewer materials, and further reduce DNA input requirements. We are dedicated to optimizing our long-read sequencing workflows, decreasing time to results, and enabling our platforms to handle a wider array of sample types. With the new sequencing kits, we anticipate reducing DNA input requirements for whole-genome sequencing fivefold compared to last year’s requirements, now only requiring one microgram per SMRT Cell in human whole-genome applications. We are also collaborating with Google Health to jointly develop deep learning methods based on their deep consensus algorithms, aiming to enhance our raw read accuracy. With slight improvements in our raw read accuracy, we can reduce run times, increase throughput, and enhance consensus accuracy even further. What I am particularly excited about is the introduction of our upgraded software plan this April, allowing every Sequel IIe system to perform on-instrument methylation detection at no extra cost or additional workflow steps. Let me discuss why this new feature is set to provide our customers with more comprehensive information on every sequenced sample, potentially unlocking significant biological discoveries. As many are aware, epigenetic changes, which are factors beyond the DNA sequence, can influence how genes behave. Methylation, a type of epigenetic change, involves altering the chemical structure of a DNA base by adding a set of atoms known as a methyl group. Methylation linked to silencing DNA can also affect gene expression. Our understanding of the implications of methylation in human disease has significantly advanced over the years, with research indicating that methylation patterns may play a crucial role in various human cancers. Consequently, we believe that methylation sequencing should be a vital aspect of genomics and biological research, presenting opportunities for new discoveries with enhanced detection technology. Detecting both methylation and DNA sequences on other platforms can entail complex workflows and multiple sequencing runs, limiting the scope of epigenome sequencing compared to genome sequencing. With our software release, we believe PacBio will be the only instrument provider currently capable of offering simultaneous detection of both DNA sequences and methylation signatures without adjusting sample prep or sequencing performance and at no additional cost or extra workflow steps. Utilizing this feature in early access, researchers at Children's Mercy, Kansas City reported discovering both a long repeat expansion and hypermethylation in the DMPK gene from a sample of a patient diagnosed with a type of muscular dystrophy. The team believes that accurately linking genetics and epigenetics within the same HiFi workflow could have immediate applications in medical genomics. Next, let’s discuss our short-read sequencing platform obtained through the acquisition of Omniome in Q3. Our product development program is on course. As mentioned last month, we've successfully implemented a new clustering method that enhances density, streamlines workflows, and improves overall performance and accuracy. We consistently observe high accuracy on our alpha systems, with over 90% of reads at Q40 levels or better, equivalent to one error in every 10,000 bases. We believe this accuracy surpasses the specifications announced for other sequencers by over tenfold. Our team is diligently working to integrate these advancements into beta systems, which we expect to produce over 120 gigabases per flow cell. We anticipate these beta systems will reach customers in the latter half of this year and roll out globally in the first half of next year. Now, regarding organizational updates, the integration of Circulomics and Omniome is progressing well. We are expanding our R&D presence in San Diego and Baltimore. Our sales force can now directly offer our Nanobind extraction kits to all customers worldwide. We have finalized our leadership build-out with Lara Toerien joining as General Manager of the Americas, Jason Kang as General Manager of Asia Pacific, and Chris Seipert, a PacBio veteran, leading a new customer experience function. I am very pleased to have these leaders on board, as they carry extensive customer relationships and years of experience in building successful sales and support teams. Now, I'll turn the call over to Susan to review our financial results.

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 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 one third 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.

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 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 one of its seven technologies that look to shake up science this year. Looking back at 2021, one crucial revelation that came to the forefront of the 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.

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

Congratulations on the quarter and the transformative year. I'd like to discuss the guidance. The 2022 guidance and the first quarter guidance are below expectations, and you mentioned aspects we didn't hear from your peers last week, such as lower January utilization due to COVID and some delays. Could you elaborate on this with more details or clarification? I'm curious to know if this is mostly related to the smaller installed base, given that the commercial team is growing but the overall revenue base has a lower starting point. Are you anticipating that any of these delayed placements will materialize later in the year? It would be helpful to understand the factors contributing to the relatively weaker performance expectations for the first half and the first quarter.

Thank you for the question, Kyle. There’s a lot to discuss. Starting with consumables, we ended the year with a slight downward trend in utilization, but it wasn't significant, and we still achieved record revenues. However, in January, we began to see declines in utilization across all three primary territories in relation to consumables. After examining the situation in early February, we realized that COVID is impacting us more than I initially expected. Given our smaller revenue base and fewer customers who are more price-sensitive, we feel these effects more acutely. Nevertheless, we believe that utilization will return to normal levels and continue to grow, which is why we provided an annual revenue guidance of $160 million to $170 million. Regarding instrumentation, our smaller customers are facing challenges in the current macro environment. Many new companies and those that went public recently are being more conservative with their spending due to higher market volatility. Their spending isn't disappearing, but they are being more cautious about their growth pace. Also, our business is primarily academically focused and project-based rather than commercial, which means many of our clients are either working from home or delaying project starts as the Omicron variant runs its course, particularly in the United States. I believe this is impacting our first quarter, but we're optimistic about a recovery that sets us up for a strong year. Based on the data from the first six weeks, we felt it was prudent to share our first quarter expectations. I hope this provides some clarity.

That was a great point, Christian. It confirms what I was trying to get at with my earlier question. For a follow-up, though not related, I wanted to ask about something from the past. I know you weren't with the company at that time, but I wanted to touch on it since we're approaching that period. I'm curious about the effect on PacBio in terms of acquiring new customers or usage after the primary linked to long-read business left the market in the early to mid-2020 timeframe. I didn’t ask about this before, and it wasn’t discussed much, mainly because the company was coming off the Illumina merger and management had been shutting down these synthetic methods for a while. I'm interested in understanding the overlap, if any, between the linked-read users and the PacBio native long-read users. Furthermore, it would be helpful if you could discuss the expected overlap between the two technologies regarding applications and users, if possible.

It's a challenging question to address since none of us were present in 2020, and I lack a real point of reference from that time. However, based on my observations of the business today and discussions with multiple customers over the last month as we see the linked long-read story emerging, it appears that customers using our technology are not looking to switch to a synthetic long-read, which means short-reads combined to create a pseudo long-read. There are, however, new customers who will consider all options before making purchasing decisions. What's noteworthy is that our funnels for acquiring new customers are currently larger than they have ever been in the company's history. I don't believe this situation significantly impacts our business now or will have a major effect throughout the year. While I may not fully appreciate the past, conversations with customers reveal that most recognize the advantages of native long-reads, acknowledge the benefits of HiFi in terms of completeness and accuracy, and generally prefer to choose that option. We'll see how things unfold, but we feel optimistic about our technological standing.

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, I'll address that. When considering the underlying assumptions, the first is that there are no significant deals forecasted that would reach a population seat scale. We are pursuing several opportunities in this area, and if we secure one of those projects, it is very likely we will exceed our guidance. However, we think it’s wise to treat these as potential upside for the company since such deals are unpredictable. Regarding consumable pull-through, we anticipate a decline in Q1 due to lower utilization in January compared to Q4 levels. As COVID subsides and customers start using their systems more, we expect this trend to reverse. Nonetheless, this improvement might be balanced out by our increased instrument placements each quarter, which take time to ramp up. We are also gaining many new customers, which prolongs the ramp-up period to full utilization. For existing customers, adding capacity is straightforward, and increasing utilization and pull-through is limited by samples, though these samples are usually close at hand if they’re acquiring new equipment. For new customers, we are assisting them in developing their workflow as they acquire the samples necessary for their operations, which elongates the pull-through development. Overall, we believe consumable pull-through will improve but will depend on various factors including the return to work and the mix of new customers acquired each quarter.

Got it. That's helpful, Christian. I have a quick follow-up regarding the instrument cadence and the uplift you expect in the second half of the year. There are a few different factors to consider. You've mentioned the improvements to Sequel II that will be launched in April, and I'm not certain if those include the new library prep and sequencing kits, which were also projected for the first half of the year. So, you have enhancements to your existing portfolio. On the other side, it seems some synthetic long-read solutions from competitors may emerge in the latter half of the year, which also brings you closer to your next version of Sequel, potentially complicating customer decisions about new purchases. Can you outline the factors at play here and your strategy to ensure that the market remains active despite these dynamics?

We plan to keep demonstrating our commitment to enhancing the Sequel II platform, including the IIe and new upgrades set for April. We believe this will give us significant momentum. Currently, our instrument funnels are strong, possibly stronger than ever in the company's history. The key task ahead is showcasing these improvements to customers and explaining the value of investing in the Sequel II platform, which can advance their scientific goals. As we progress through the year, we anticipate facing numerous emerging priorities and competitor offerings, both in synthetic and short-read technologies, giving customers more options than before. To sustain instrument demand, we must illustrate the advantages of HiFi technology. For example, the insights gained from the first run conducted by Children's Mercy have generated excitement among our team and revealed new applications we can explore further, boosting market engagement and demand. Our primary focus is to continue emphasizing our compelling value proposition, which we believe is stronger than ever. We offer the most accurate and comprehensive sequencer available and are enhancing its capabilities with additional methylation features. On the workflow side, we are streamlining processes, with many upgrades launched in April, allowing us to utilize these enhancements to stimulate demand throughout the year. We're taking a comprehensive approach to the entire sample-to-answer workflow, concentrating on core technological improvements that will facilitate more samples on the sequencer, now requiring only one microgram of input DNA for whole-genome applications. These advancements will broaden our market reach while providing our sales team, now in a strong position, the tools they need to drive instrument sales. Looking ahead, developing deep customer relationships is essential to ensuring that our clients feel they are maximizing their partnership with PacBio. As new platforms enter the market, we will focus on collaborating with our customers in ways that keep them enthusiastic about being 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?

One of the factors influencing that was public health labs. We initiated a program to enable public health labs to reach HiFiViral capability more quickly, which had some effect. We are also very focused on increasing instrument placements worldwide. This involves a variety of average sale prices, whether through multi-system agreements or specific cases where we aim to penetrate new markets or expand our installed base to promote the use of long-read technology. Looking ahead to 2022, I anticipate that average sale prices will vary and depend on several outlined factors, likely fluctuating based on the nature of the customer deals we engage in. For instance, if a major customer opts for significant scaling, we might see a corresponding impact on average sale prices during that quarter. Ultimately, our current emphasis is on expanding our installed base because this lays the groundwork for future opportunities when new platforms are introduced, allowing us to effectively engage with 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, let me hand it over to Mark, who can provide some insights on the timing related to Omniome since he is leading that project. I oversee all projects ultimately, but I think Susan can also discuss the in-process R&D. Mark, would you like to address that?

Yes, I'm happy to. As we mentioned, Tycho, we will continue our development efforts for the next couple of quarters and expect to enter beta testing in the latter half of this year. We are currently running customer collaboration samples in-house, so I anticipate that we will share more customer data generated with them even before we officially launch the beta program. As we move towards the end of this year and prepare for the full commercial launch in the first half of 2023, we will be showcasing more of our progress. It’s important for everyone to be able to evaluate the accuracy we provide with SBB compared to other emerging SBS players, as well as Chemistry X and others that will be demonstrating their capabilities later 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?

I believe that overall, the market is large and growing, allowing for many participants. This represents market expansion. However, I remain convinced that synthetic long-reads or stitched-together short reads are not viable solutions for clinical sequencing. Native long-reads provide more comprehensive information, whether from us or any other provider of native long-reads, allowing for a more detailed understanding of biology. If this can be done economically, there’s no need to resort to stitching together short reads. From my viewpoint, I don't see this having a significant impact on our future. Occasionally, there may be customers with short-read sequencers interested in doing some long-read sequencing at shorter lengths, and that could spark their interest in long-reads. This provides us an opportunity to engage those customers when they decide to seriously integrate long-reads into their research and workflows. This could ultimately expand our market 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 it was a funnel. I know that's yes.

Yes, that's separate from the backlog. I would definitely like to have the whole funnel in the backlog. The funnel comprises all the customers who have shown interest in our products, whether it's for sequencers or seeking service labs to utilize our technology. We categorize that funnel based on where we believe they are in the sales process. The customers at the end of the funnel are the ones that make it into the forecast, and we focus on closing those deals. In 2021, we worked hard on building those funnels and generating demand. I was surprised to see how little outreach was done before my arrival regarding customer engagement across various regions. I approved a job offer today for what I believe will be our first hire in Australia. I'm hopeful that will lead to someone joining the team there. Our funnels are now larger than ever, indicating we're seeing more opportunities and excitement. The advantages of HiFi sequencing, its completeness, and the ability to detect methylases are significant drivers of demand. As for headcount, I don’t have the exact sales numbers, but we more than doubled our sales force in 2021, now nearly 50 direct sales representatives. In 2022, we plan to keep expanding the sales force, especially focusing on quota-carrying sales reps who will be accountable to our customers. We'll also enhance our customer support and field application specialists, particularly in regions where we need more representation. Most of the heavy lifting was completed in 2021, and I'm pleased with that progress as it was crucial for establishing long-term growth. Now, it's about refining our strategy and executing effectively. I hope that provides clarity, Dan.

Yes, I apologize for that. As a follow-up, I have a two-part question. Regarding POPSEQ, I would like to know our current status in the U.S. I understand there are some betas or smaller subsets being tested on long-reads. When do you anticipate that could expand in the U.S.? I know you mentioned some news related to that. What is included in your plans for 2022, and what potential benefits do you foresee? Additionally, I would like to ask about the full year guidance. You haven't provided a specific number or range for how the segments of instruments and consumables will be allocated in your guidance, have you? Would you be open to sharing that information?

We did not provide details on the revenue composition at this time, but I believe we will offer more insights as the year progresses. We mentioned that the second half of the year is expected to be stronger than the first half, which seems clear given the current challenges with COVID. However, we anticipate overall business growth, with a focus on increasing our installed base. The installations from 2021 and early 2022 are expected to have a positive impact on consumable revenue as those systems become operational. While we expect growth across the board this year, we did not share specific numbers. For now, it’s prudent to monitor our progress and provide updates later in the year. Regarding POPSEQ, we are currently a small participant in that program with a key customer operating at full capacity, resulting in a significant number of samples being processed. There are opportunities to expand, particularly for long-reads, but we have not factored that into our forecasts for the year, nor have we included potential major expansions. We have intentionally excluded large, binary projects from the forecast as our primary focus is on achieving our base business goals globally and delivering on our commitments each quarter. We are pursuing new opportunities and will act on them as they arise, which may enable us to grow even more rapidly. That’s my perspective on the situation.

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 basis points 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?

In the fourth quarter, we began to experience some effects from increased costs due to global supply chain issues, but it was not significantly impactful, around 0.5%. Looking forward to 2022, we anticipate a greater effect on our gross margins, estimating a decrease of 1 to 2 points, likely leaning toward the higher end of that range due to rising costs. On a positive note, our procurement team is actively working to secure the necessary components to meet demand, which is going well, although it does come with added expenses.

Yes. When considering the need to build up inventory for our customers, I have asked the team to increase our SMRT Cell inventory beyond our usual levels. This precaution is to prevent supply disruptions in case parts of our team are affected by COVID and we face manufacturing delays. The team has responded exceptionally well, and I must commend the purchasing group for securing the majority of the components needed to meet the expected demand for SMRT Cells this year. On the instrument side, we are in a more challenging situation as we compete for the same FPGAs and other integrated circuits as other companies. Nonetheless, this has not affected our business so far, and it appears unlikely to have a significant impact in the near future. The team is managing this risk effectively. We are monitoring the situation daily to ensure we can serve our global customers to the best of our ability.

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

Thank you for participating today. We had a great year in 2021, and we believe we are in the best position in our history to achieve another record-setting year in 2022. The year has started off somewhat slowly due to some COVID-related challenges, particularly with consumables, but we are addressing those on a weekly basis. As COVID begins to recede, we expect demand and activity to pick up, which will further drive demand. We appreciate everyone's support on the call, and we look forward to providing updates as the year progresses. Thank you very much.

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